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

For the quarterly period ended October 2, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to
Commission File Number: 001-38950

Grocery Outlet Holding Corp.
(Exact name of registrant as specified in its charter)
Delaware47-1874201
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
5650 Hollis Street, Emeryville, California
94608
(Address of principal executive offices)(Zip Code)
(510845-1999
(Registrant's telephone number, including area code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes    No  ☒
As of November 4, 2021, the registrant had 96,017,043 shares of common stock outstanding.




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

1

Table of Contents

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, our objectives for future operations, and the sufficiency of our cash balances, working capital and cash generated from operating, investing and financing activities for our future liquidity and capital resource needs may constitute forward-looking statements. Words such as "anticipate," "believe," "estimate," "expect," "intend," "may," "outlook," "plan," "project," "seek," "will," and similar expressions, are intended to identify such forward-looking statements. 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 that may cause actual results to differ materially from those expressed or implied by any forward-looking statements we make, including those described under the headings "Risk Factors," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in our Annual Report on Form 10-K for the fiscal year ended January 2, 2021, as amended (the "2020 Form 10-K"), and as described in subsequent reports we file with the United States ("U.S.") Securities and Exchange Commission (the "SEC"), including this report. We encourage you to read this report and our other filings with the SEC carefully. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. 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 are made as of the date of this report or as of the date specified herein. Except as required by law, we do not undertake any duty to update any of these forward-looking statements after the date of this report or to conform these statements to actual results or revised expectations.
As used in this report, references to "Grocery Outlet," "the Company," "registrant," "we," "us" and "our," refer to Grocery Outlet Holding Corp. and its consolidated subsidiaries unless otherwise indicated or the context requires otherwise.
Website Disclosure
We use our website, 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, incorporated by reference or a part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, and the Proxy Statement for our Annual Meeting of Stockholders are available, free of charge, on our website as soon as practicable after the we file the reports with the SEC.

2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(unaudited)
October 2,
2021
January 2,
2021
Assets
Current assets:
Cash and cash equivalents$155,976 $105,326 
Independent operator receivables and current portion of independent operator notes, net of allowance $1,266 and $985
6,003 5,443 
Other accounts receivable, net of allowance $7 and $39
3,615 5,950 
Merchandise inventories245,844 245,157 
Prepaid expenses and other current assets18,967 20,081 
Total current assets430,405 381,957 
Independent operator notes, net of allowance $10,029 and $7,124
21,225 27,440 
Property and equipment, net484,718 433,652 
Operating lease right-of-use assets875,652 835,397 
Intangible assets, net49,242 48,226 
Goodwill747,943 747,943 
Deferred income tax assets, net 3,529 
Other assets8,483 7,480 
Total assets$2,617,668 $2,485,624 
Liabilities and Stockholders' Equity
Current liabilities:
Trade accounts payable$122,055 $114,278 
Accrued expenses45,703 35,699 
Accrued compensation6,745 26,447 
Current lease liabilities46,013 48,675 
Income and other taxes payable7,945 7,547 
Total current liabilities228,461 232,646 
Long-term debt, net450,860 449,233 
Deferred income tax liabilities, net5,556  
Long-term lease liabilities938,760 881,438 
Total liabilities1,623,637 1,563,317 
Commitments and contingencies (Note 7)
Stockholders' equity:
Voting common stock, par value $0.001 per share, 500,000,000 shares authorized; 96,007,519 and 94,854,336 shares issued and outstanding, respectively
96 95 
Additional paid-in capital803,099 787,047 
Retained earnings190,836 135,165 
Total stockholders' equity994,031 922,307 
Total liabilities and stockholders' equity$2,617,668 $2,485,624 
See Notes to Condensed Consolidated Financial Statements
3

Table of Contents

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(in thousands, except per share data)
(unaudited)
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Net sales$768,880 $764,082 $2,296,881 $2,327,819 
Cost of sales531,768 525,899 1,590,044 1,598,859 
Gross profit237,112 238,183 706,837 728,960 
Operating expenses:
Selling, general and administrative191,572 189,880 573,125 574,813 
Depreciation and amortization17,495 14,131 49,997 40,291 
Share-based compensation1,902 3,857 10,051 34,309 
Total operating expenses210,969 207,868 633,173 649,413 
Income from operations26,143 30,315 73,664 79,547 
Other expenses (income):
Interest expense, net3,950 4,833 11,778 15,937 
Gain on insurance recoveries  (3,970) 
Debt extinguishment and modification costs   198 
Total other expenses (income)3,950 4,833 7,808 16,135 
Income before income taxes22,193 25,482 65,856 63,412 
Income tax expense (benefit)5,054 (14,992)10,185 (19,037)
Net income and comprehensive income$17,139 $40,474 $55,671 $82,449 
Basic earnings per share$0.18 $0.44 $0.58 $0.91 
Diluted earnings per share$0.17 $0.41 $0.56 $0.84 
Weighted average shares outstanding:
Basic95,955 92,489 95,610 90,929 
Diluted99,169 99,266 99,477 98,033 
See Notes to Condensed Consolidated Financial Statements

4

Table of Contents

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share amounts)
(unaudited)
Voting CommonAdditional
Paid-In Capital
Retained EarningsStockholders' Equity
SharesAmount
Balance as of January 2, 202194,854,336 $95 $787,047 $135,165 $922,307 
Exercise and vesting of share-based awards647,137 1 2,952 2,953 
Share-based compensation expense3,939 3,939 
Dividends paid(5)(5)
Net income and comprehensive income18,892 18,892 
Balance as of April 3, 202195,501,473 $96 $793,933 $154,057 $948,086 
Exercise and vesting of share-based awards335,747  2,039 2,039 
Share-based compensation expense4,210 4,210 
Dividends paid(92)(92)
Net income and comprehensive income 19,640 19,640 
Balance as of July 3, 202195,837,220 $96 $800,090 $173,697 $973,883 
Exercise and vesting of share-based awards170,299  1,146 1,146 
Share-based compensation expense1,902 1,902 
Dividends paid(39)(39)
Net income and comprehensive income17,139 17,139 
Balance as of October 2, 202196,007,519 $96 $803,099 $190,836 $994,031 
See Notes to Condensed Consolidated Financial Statements

5

Table of Contents

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY, continued
(in thousands, except share amounts)
(unaudited)
Voting CommonAdditional
Paid-In Capital
Retained EarningsStockholders' Equity
SharesAmount
Balance as of December 28, 201989,005,062 $89 $717,282 $28,013 $745,384 
Cumulative effect of accounting change439 439 
Exercise and vesting of share-based awards902,132 1 6,032 6,033 
Share-based compensation expense20,277 20,277 
Dividends paid(147)(147)
Net income and comprehensive income12,642 12,642 
Balance as of March 28, 202089,907,194 $90 $743,444 $41,094 $784,628 
Exercise and vesting of share-based awards1,511,079 1 9,844 9,845 
Tax paid on behalf of employees related to net settlement of share-based awards(483)(483)
Share-based compensation expense10,175 10,175 
Dividends paid(97)(97)
Net income and comprehensive income29,333 29,333 
Balance as of June 27, 202091,418,273 $91 $762,883 $70,427 $833,401 
Exercise and vesting of share-based awards2,486,649 3 11,252 11,255 
Share-based compensation expense3,857 3,857 
Dividends paid(161)(161)
Net income and comprehensive income40,474 40,474 
Balance as of September 26, 202093,904,922 $94 $777,831 $110,901 $888,826 
See Notes to Condensed Consolidated Financial Statements
6

Table of Contents

GROCERY OUTLET HOLDING CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
39 Weeks Ended
October 2,
2021
September 26,
2020
Cash flows from operating activities:
Net income$55,671 $82,449 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property and equipment46,236 36,772 
Amortization of intangible and other assets5,809 5,481 
Amortization of debt issuance costs and debt discounts1,883 1,771 
Gain on insurance recoveries(3,970) 
Debt extinguishment and modification costs 198 
Share-based compensation10,051 34,309 
Provision for accounts receivable3,529 321 
Proceeds from insurance recoveries - business interruption and inventory2,103  
Deferred income taxes9,085 (18,996)
Other950 1,421 
Changes in operating assets and liabilities:
Independent operator and other accounts receivable884 (3,809)
Merchandise inventories(687)(33,357)
Prepaid expenses and other current assets1,114 (7,505)
Income and other taxes payable398 332 
Trade accounts payable, accrued compensation and other accrued expenses(4,526)(15,545)
Changes in operating lease assets and liabilities, net13,235 15,419 
Net cash provided by operating activities141,765 99,261 
Cash flows from investing activities:
Advances to independent operators(7,614)(8,715)
Repayments of advances from independent operators3,581 5,216 
Purchases of property and equipment(89,575)(85,847)
Proceeds from sales of assets24 265 
Intangible assets and licenses(4,566)(3,826)
Proceeds from insurance recoveries - property and equipment1,867  
Net cash used in investing activities(96,283)(92,907)
Cash flows from financing activities:
Proceeds from exercise of stock options6,138 27,133 
Proceeds from revolving credit facility loan 90,000 
Principal payments on revolving credit facility loan (90,000)
Payments made for net settlement of employee share-based compensation awards (483)
Principal payments on term loans (188)
Principal payments on other borrowings(834)(729)
Dividends paid(136)(405)
Debt issuance costs paid (701)
Net cash provided by financing activities5,168 24,627 
Net increase in cash and cash equivalents50,650 30,981 
Cash and cash equivalents at beginning of period105,326 28,101 
Cash and cash equivalents at end of period$155,976 $59,082 
See Notes to Condensed Consolidated Financial Statements
7

Table of Contents

GROCERY OUTLET HOLDING CORP.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Description of Business — Based in Emeryville, California, and incorporated in Delaware in 2014, Grocery Outlet Holding Corp. (together with its wholly owned subsidiaries, collectively, "Grocery Outlet," "we," or the "Company") is a high-growth, extreme value retailer of quality, name-brand consumables and fresh products sold through a network of independently operated stores. As of October 2, 2021, we had 407 stores throughout California, Washington, Oregon, Pennsylvania, Idaho and Nevada.
Secondary Public Offerings — On February 3, 2020, 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 which we recognized in selling, general and administrative expenses ("SG&A") 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 SG&A 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.
Basis of Presentation — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and the applicable rules and regulations of the United States ("U.S.") Securities and Exchange Commission (the "SEC") for interim reporting. Certain information and note disclosures included in our annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements included in our 2020 Form 10-K. The condensed consolidated balance sheet as of January 2, 2021 included herein has been derived from those audited consolidated financial statements.
Our unaudited condensed consolidated financial statements include the accounts of Grocery Outlet Holding Corp. and its wholly owned subsidiaries. All intercompany balances and transactions were eliminated. In the opinion of management, these condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the periods presented. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for any future interim or annual period. Certain prior period amounts in the notes to the condensed consolidated financial statements 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. 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 our 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
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liabilities represent our obligation to make lease payments arising from the lease over the same term. Right-of-use assets and liabilities are recognized at commencement date based on the present value of the lease payments over the lease term, reduced by landlord incentives. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms and payments based on the information available at the commencement date, to determine the present value of our lease payments. Lease term is defined as the non-cancelable period of the lease plus any options to extend or terminate the lease when it is reasonably certain that we will exercise the option. Lease expense for operating lease payments is recognized on a straight-line basis over the lease term. Amortization of finance lease right-of-use assets, interest expense on finance lease liabilities and operating and financing cash flows for finance leases are 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.
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 October 2, 2021 or January 2, 2021. Generally, assets are recorded at fair value on a nonrecurring basis as a result of impairment charges. There were no transfers of assets or liabilities between levels within the fair value hierarchy during the periods ended October 2, 2021 or January 2, 2021, respectively.
Our financial assets and liabilities are carried at cost, which generally approximates their fair value, as described below:
Cash and cash equivalents, independent operator ("IO") receivables, other accounts receivable and accounts payable — The carrying value of such financial instruments approximates their fair value due to factors such as their short-term nature or their variable interest rates.
IO notes receivable (net) — The carrying value of such financial instruments approximates their fair value due to the effect of the related allowance for expected credit losses.
Notes payable and term loan — The carrying value of such financial instruments 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 fair values of our term loan as of October 2, 2021 and January 2, 2021 is disclosed in the below table.
The following table sets forth by level within the fair value hierarchy the carrying amounts and estimated fair values of our significant financial liabilities that are not recorded at fair value on the condensed consolidated balance sheets (amounts in thousands):
October 2,
2021
January 2,
2021
Carrying Amount (1)
Estimated Fair Value (2)
Carrying Amount (1)
Estimated Fair Value (2)
Financial Liabilities:
Term loan (Level 2)$458,951 $459,425 $458,757 $460,000 
_______________________
(1)The carrying amounts as of October 2, 2021 and January 2, 2021 are net of unamortized debt discounts of $1.0 million and $1.2 million, respectively.
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(2)The estimated fair value of our term loan was determined based on the average quoted bid-ask prices for the term loan in an over-the-counter market on the last trading day of the periods presented.
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 IOs are not recognized as a reduction in sales as these are provided solely by the IO who bears the incremental costs arising from the discount. We do not accept manufacturer coupons.
We do not have any material contract assets or receivables from contracts with customers, any revenue recognized in the current year from performance obligations satisfied in previous periods, any performance obligations, or any material costs to obtain or fulfill a contract as of October 2, 2021 and January 2, 2021.
Gift Cards — We record a deferred revenue liability when a Grocery Outlet gift card is sold. Revenue related to gift cards is recognized as the gift cards are redeemed, which is when we have satisfied our performance obligation. While gift cards are generally redeemed within 12 months, some are never fully redeemed. We reduce the liability and recognize revenue for the unused portion of the gift cards (“breakage”) under the proportional method, where recognition of breakage income is based upon the historical run-off rate of unredeemed gift cards. Our gift card deferred revenue liability was $2.8 million and $3.2 million as of October 2, 2021 and January 2, 2021, respectively. Breakage amounts were immaterial for the 13 and 39 weeks ended October 2, 2021 and September 26, 2020.
Disaggregated Revenues The following table presents net sales revenue by type of product for the periods indicated (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Perishable (1)
$268,349 $258,923 $800,623 $788,190 
Non-perishable (2)
500,531 505,159 1,496,258 1,539,629 
Total net sales$768,880 $764,082 $2,296,881 $2,327,819 
_______________________
(1)    Perishable departments include dairy and deli; produce and floral; and fresh meat and seafood.
(2)    Non-perishable departments include non-perishable grocery; general merchandise; health and beauty care; frozen foods; and beer and wine.
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Variable Interest Entities In accordance with the variable interest entities sub-section of ASC Topic 810, Consolidation, we assess at each reporting period whether we, or any consolidated entity, are considered the primary beneficiary of a variable interest entity ("VIE") and therefore required to consolidate the financial results of the VIE in our consolidated financial statements. Determining whether to consolidate a VIE may require judgment in assessing (i) whether an entity is a VIE, and (ii) if a reporting entity is a VIE's primary beneficiary. A reporting entity is determined to be a VIE's primary beneficiary if it has the power to direct the activities that most significantly impact a VIE's economic performance and the obligation to absorb losses or rights to receive benefits that could potentially be significant to a VIE.
We had 403, 375 and 367 stores operated by IOs as of October 2, 2021, January 2, 2021 and September 26, 2020, respectively. We have agreements in place with each IO. The IO orders merchandise exclusively from us which is provided to the IO on consignment. Under the Independent Operator Agreement (the "Operator Agreement"), the IO may select a majority of merchandise that we consign to the IO, which the IO chooses from our merchandise order guide according to the IO's knowledge and experience with local customer purchasing trends, preferences, historical sales and similar factors. The Operator Agreement gives the IO discretion to adjust our initial prices if the overall effect of all price changes at any time comports with the reputation of our Grocery Outlet retail stores for selling quality, name-brand consumables and fresh products and other merchandise at extreme discounts. IOs are required to furnish initial working capital and to acquire certain store and safety assets. The IO is also required to hire, train and employ a properly trained workforce sufficient in number to enable the IO to fulfill its obligations under the Operator Agreement. Additionally, the IO is responsible for expenses required for business operations, including all labor costs, utilities, credit card processing fees, supplies, taxes, fines, levies and other expenses. Either party may terminate the Operator Agreement without cause upon 75 days' notice.
As consignor of all merchandise to each IO, the aggregate net sales proceeds from merchandise sales belongs to us. Net sales related to IO stores were $754.4 million and $750.5 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $2.26 billion and $2.28 billion for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively. We, in turn, pay IOs a commission based on a share of the gross profit of the store. Inventories and related net sales proceeds are our property, and we are responsible for store rent and related occupancy costs. IO commissions were expensed and included in SG&A. IO commissions were $117.2 million and $114.2 million for the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $345.3 million and $351.1 million for the 39 weeks ended October 2, 2021 and September 26, 2020, respectively. IO commissions of $8.0 million and $6.0 million were included in accrued expenses as of October 2, 2021 and January 2, 2021, respectively.
IOs 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 IO obligations and performance, the Operator Agreements grant us the security interests in the assets owned by the IOs related to the respective store. Since the total investment at risk associated with each IO is not sufficient to permit each IO to finance its activities without additional subordinated financial support, the IOs 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 IO's economic performance and (ii) the obligation to absorb losses or the right to receive benefits of the IO that could potentially be significant to the IO. Our evaluation includes identification of significant activities and an assessment of its ability to direct those activities.
Activities that most significantly impact the IO's economic performance relate to sales and labor. Sales activities that significantly impact the IO's economic performance include determining what merchandise the IO will order and sell and the price of such merchandise, both of which the IO controls. The IO is also responsible for all of their own labor. Labor activities that significantly impact the IO's economic performance include hiring, training, supervising, directing, compensating (including wages, salaries and employee benefits) and terminating all of the employees of the IO, activities which the IO controls. Accordingly, the IO has the power to direct the activities that most significantly impact the IO's economic performance. Furthermore, the mutual termination rights associated with the Operator Agreements illustrate the lack of ultimate control over the IO. Therefore, the Company is not the primary beneficiary of these VIEs.
Our maximum exposure to the IOs is generally limited to the IO notes and IO receivables due from these entities, which was $38.5 million and $41.0 million as of October 2, 2021 and January 2, 2021, respectively. See Note 2 for additional information.
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Recently Adopted Accounting Standards
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 adopted ASU 2019-12 beginning in the first quarter of fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
No recently issued accounting pronouncements are expected to have a material effect on our condensed consolidated financial statements.
Note 2. Independent Operator Notes and Independent Operator Receivables
The amounts included in IO notes and IO receivables consist primarily of funds we loaned to IOs, net of estimated uncollectible amounts. IO notes are payable on demand and typically bear interest at rates between 3.00% and 9.95%. Accrued interest receivable on IO notes is included within the “independent operator receivables and current portion of independent operator notes, net of allowance” line item on the condensed consolidated balance sheets and was $0.3 million and $0.4 million as of October 2, 2021 and January 2, 2021, respectively. There were no IO notes that were past due or on a non-accrual status due to delinquency as of October 2, 2021 or January 2, 2021. Notes and receivables from our IOs participating in our TCAP, as defined below, are not considered to be past due or on a non-accrual status due to delinquency and are excluded from such measures.
IO notes and IO receivables are financial assets which are measured and carried at amortized cost. An allowance for expected credit losses is deducted from (for expected losses) or added to (for expected recoveries) the amortized cost basis of these assets to arrive at the net carrying amount expected to be collected for such assets.
The allowance is estimated using an expected loss framework, which includes information about past events, current conditions, and reasonable and supportable forecasts that impact the collectibility of the reported amounts of the assets over their lifetime. The allowance is evaluated on a collective basis for assets with shared risk characteristics and credit quality indicators. The primary shared risk characteristic and credit quality indicator pools that we use as a basis for collective evaluation include:
TCAP — Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are participating in our Temporary Commission Adjustment Program (“TCAP”) as of the end of each reporting period. TCAP allows us to provide a greater commission to participating IOs who require assistance in meeting their working capital needs for various reasons, such as new or increased competition or differences in IO skills and experience.
Non-TCAP Includes the notes and receivables from IOs with stores that have been open for more than 18 months that are not participating in TCAP as of the end of each reporting period.
New store Includes the notes and receivables from IOs with stores that have been open for less than 18 months as of the end of each reporting period.
Assets without such shared risk characteristics or credit quality indicators, such as assets with unique circumstances or with delinquencies and historical losses in excess of their TCAP, non-TCAP or new store peers are evaluated on an individual basis.
Amounts due from IOs and the related allowances as of October 2, 2021 and January 2, 2021 consisted of the following (amounts in thousands):
AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
October 2, 2021
Independent operator notes$33,425 $(653)$(10,029)$22,743 $1,518 $21,225 
Independent operator receivables5,098 (613) 4,485 4,485  
Total$38,523 $(1,266)$(10,029)$27,228 $6,003 $21,225 
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AllowanceCurrent PortionLong-term Portion
GrossCurrent PortionLong-term PortionNet
January 2, 2021
Independent operator notes$37,238 $(514)$(7,124)$29,600 $2,160 $27,440 
Independent operator receivables3,754 (471) 3,283 3,283  
Total$40,992 $(985)$(7,124)$32,883 $5,443 $27,440 

A summary of activity in the IO notes and receivable allowance was as follows (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Beginning balance$10,177 $9,178 $8,109 $10,371 
Provision for IO notes and IO receivables1,261 384 3,561 311 
Cumulative effect of accounting change   (439)
Write-off of provision for IO notes and IO receivables(143)(46)(375)(727)
Ending Balance$11,295 $9,516 $11,295 $9,516 

The following table presents the amortized cost basis of IO notes by year of origination and credit quality indicator as of October 2, 2021 (amounts in thousands):
Credit Quality Indicator2021 (YTD)2020201920182017PriorTotal
TCAP$2,050 $2,465 $2,075 $1,510 $532 $ $8,632 
Non-TCAP4,008 3,155 4,037 2,178 1,178 646 15,202 
New store5,329 4,262     9,591 
Total$11,387 $9,882 $6,112 $3,688 $1,710 $646 $33,425 

Note 3. Long-term Debt
Long-term debt consisted of the following (amounts in thousands):
October 2,
2021
January 2,
2021
First Lien Credit Agreement:
Term loan$460,000 $460,000 
Long-term debt, gross460,000 460,000 
Less: Unamortized debt discounts and debt issuance costs
(9,140)(10,767)
Long-term debt, net$450,860 $449,233 
First Lien Credit Agreement
GOBP Holdings, Inc ("GOBP Holdings"), our wholly owned subsidiary, together with another of our wholly owned subsidiaries, has a first lien credit agreement (the “First Lien Credit Agreement”) with a syndicate of lenders that consists of a $460.0 million senior term loan and a revolving credit facility for an amount up to $100.0 million, with sub-commitments for a $35.0 million letter of credit and $20.0 million of swingline loans as of October 2, 2021. The First Lien Credit Agreement permits voluntary prepayment on borrowings without premium or penalty. Borrowings under the First Lien Credit Agreement are secured by substantially all the assets of the borrower subsidiary and its guarantors.
Term Loan
Our $460.0 million senior term loan matures on October 22, 2025 and had an interest rate of 2.88% as of October 2, 2021. Due to previous prepayments on the term loan, no further principal payment on the term loan will be due until the maturity date.
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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 a previous incremental agreement (the "First Incremental Agreement"). The Second Incremental Agreement refinanced a previous 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. 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.
Revolving Credit Facility
As of October 2, 2021, we had $3.5 million of outstanding standby letters of credit and $96.5 million of remaining borrowing capacity available under the revolving credit facility. No amounts were outstanding under the revolving credit facility as of October 2, 2021 and January 2, 2021.
We are required to pay a quarterly commitment fee ranging from 0.25% to 0.50% on the daily unused amount of the commitment under the revolving credit facility based upon the leverage ratio defined in the agreement and certain criteria specified in the agreement. We are also required to pay fronting fees and other customary fees for letters of credit issued under the revolving credit facility. The interest rate for the revolving credit facility is determined based on a formula using certain market rates.
On March 19, 2020, we borrowed $90.0 million under the revolving credit facility of our First Lien Credit Agreement (the "Revolving Credit Facility Loan"), the proceeds of which were to be used as reserve funding for working capital needs as a precautionary measure in light of the economic uncertainty surrounding the COVID-19 pandemic. On May 26, 2020, we repaid the Revolving Credit Facility Loan in full.
Debt Covenants
The First Lien Credit Agreement contains certain customary representations and warranties, subject to limitations and exceptions, and affirmative and customary covenants. The First Lien Credit Agreement restricts us from entering into certain types of transactions and making certain types of payments including dividends and stock repurchase and other similar distributions, with certain exceptions. Additionally, the revolving credit facility under our First Lien Credit Agreement is subject to a first lien secured leverage ratio (as defined in the First Lien Credit Agreement) of 7.00 to 1.00.
As of October 2, 2021, we were in compliance with all applicable financial covenant requirements for our First Lien Credit Agreement.
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Schedule of Principal Maturities
Principal maturities of debt as of October 2, 2021 are as follows (amounts in thousands):
Remainder of fiscal 2021$ 
Fiscal 2022 
Fiscal 2023 
Fiscal 2024 
Fiscal 2025460,000 
Thereafter 
Total$460,000 
Interest Expense, Net
Interest expense, net, consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Interest on loans$3,489 $4,463 $10,454 $15,234 
Amortization of debt issuance costs and debt discounts628 634 1,883 1,771 
Interest on finance leases98 98 288 285 
Other2 12 8 25 
Interest income(267)(374)(855)(1,378)
Interest expense, net$3,950 $4,833 $11,778 $15,937 
Debt Extinguishment and Modification Costs
Debt extinguishment and modification costs consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Write-off of debt issuance costs$ $ $ $74 
Debt modification costs   124 
Debt extinguishment and modification costs$ $ $ $198 

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Note 4. Share-based Awards
For a discussion of our share-based incentive plans, refer to NOTE 7 —Share-based Awards of our 2020 Form 10-K.
Grant Activity
The following table summarizes stock option activity under all equity incentive plans during the 39 weeks ended October 2, 2021:
Time-Based Stock OptionsPerformance-Based Stock Options
Number of OptionsWeighted-Average
Exercise Price
Number of OptionsWeighted-Average
Exercise Price
Options outstanding as of January 2, 2021
3,864,772$12.422,325,580$4.54
Exercised(422,138)7.73(608,641)4.39
Forfeitures(180,839)19.64
Options outstanding as of October 2, 2021
3,261,795$12.631,716,939$4.59
Options vested and exercisable as of October 2, 2021
1,983,997$7.551,716,939$4.59
The following table summarizes restricted stock unit ("RSU") activity under all equity incentive plans during the 39 weeks ended October 2, 2021:
Number of SharesWeighted-Average
Grant Date Fair Value
Unvested balance as of January 2, 2021
341,842 $35.16 
Granted333,418 35.22 
Vested(100,308)37.05 
Forfeitures(50,140)35.18 
Unvested balance as of October 2, 2021
524,812 $34.83 
The following table summarizes performance-based restricted stock unit ("PSU") activity under the Grocery Outlet Holding Corp. 2019 Incentive Plan during the 39 weeks ended October 2, 2021:
Number of SharesWeighted-Average
Grant Date Fair Value
Unvested balance as of January 2, 2021
407,462 $36.90 
Granted (1)
319,606 35.45 
Adjustment for expected performance achievement (2)
(213,727)35.86 
Forfeitures(56,287)36.53 
Unvested balance as of October 2, 2021 (3)
457,054 $36.41 
_______________________
(1)Represents initial grant of PSUs based on performance target level achievement of 100%.
(2)Represents the adjustment to previously granted PSUs based on performance expectations as of October 2, 2021.
(3)An additional 641,180 PSUs could potentially be included if the maximum performance level of 200% is reached for all PSUs outstanding as of October 2, 2021.
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Share-Based Compensation Expense
We recognize compensation expense for stock options, RSUs and PSUs by amortizing the grant date fair value on a straight-line basis over the expected vesting period to the extent we determine the vesting of the grant is probable. We recognize share-based award forfeitures in the period such forfeitures occur.
Share-based compensation expense consisted of the following (amounts in thousands):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Time-based stock options$430 $717 $1,467 $2,187 
Performance-based stock options   26,079 
RSUs1,749 1,325 5,162 3,517 
PSUs(316)1,654 3,286 2,121 
Dividends (1)
39 161 136 405 
Share-based compensation expense$1,902 $3,857 $10,051 $34,309 
_______________________
(1)Represents cash dividends paid upon vesting of share-based awards as a result of dividends declared in connection with recapitalizations that occurred in fiscal 2018 and 2016.

Note 5. Income Taxes
Our income tax expense (benefit) and effective income tax rate were as follows (amounts in thousands, except percentages):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Income tax expense (benefit)$5,054 $(14,992)$10,185 $(19,037)
Effective income tax rate22.8 %(58.8)%15.5 %(30.0)%
The change from net income tax benefits of $15.0 million and $19.0 million for the 13 and 39 weeks ended September 26, 2020, respectively, to net income tax expenses of $5.1 million and $10.2 million for the 13 and 39 weeks ended October 2, 2021, respectively, was primarily driven by a reduction in excess tax benefits related to the exercise of stock options and vesting of RSUs, as compared to the same periods in fiscal 2020.
The Company's tax provision for interim periods is determined using an estimated annual effective tax rate, adjusted for discrete events arising in each respective quarter. During each interim period, the Company updates the estimated annual effective tax rate. Our effective income tax rate for the 13 and 39 weeks ended October 2, 2021 was lower than the combined U.S. federal and state statutory income tax rate primarily due to excess tax benefits related to the exercise of stock options and vesting of RSUs. The increase in our effective income tax rate for the 13 and 39 weeks ended October 2, 2021 compared to the corresponding period in fiscal 2020 was primarily due to the above mentioned reduction in discrete items related to the exercise of stock options and vesting of employee RSUs.
Our policy is to recognize interest and penalties associated with uncertain tax positions as part of the income tax provision and include accrued interest and penalties with the related income tax liability on our condensed consolidated balance sheets. To date, we have not recognized any interest and penalties in our condensed consolidated statements of operations and comprehensive income, nor have we accrued for or made payments for interest and penalties. We had no uncertain tax positions as of October 2, 2021 and January 2, 2021, respectively, and do not anticipate any changes to our uncertain tax positions within the next 12 months.
Note 6. Related Party Transactions
Related Party Leases
We leased properties from entities affiliated with certain of our non-controlling stockholders for 15 store locations and one warehouse location as of both October 2, 2021 and September 26, 2020. Affiliated entities received aggregate lease payments from us of $1.5 million for each of the 13 weeks ended October 2, 2021 and September 26, 2020, respectively, and $4.5 million for each of the 39 weeks ended October 2, 2021 and September 26, 2020, respectively.
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Independent Operator Notes and Independent Operator Receivables
We offer interest-bearing notes to IOs and the gross IO operating notes and IO receivables due from these was $38.5 million and $41.0 million as of October 2, 2021 and January 2, 2021, respectively. See Note 2 for additional information.
Note 7. Commitments and Contingencies
We are involved from time to time in claims, proceedings and litigation arising in the normal course of business. We do not believe the impact of such litigation will have a material adverse effect on our condensed consolidated financial statements taken as a whole.
Note 8. Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share (amounts in thousands, except per share data):
13 Weeks Ended39 Weeks Ended
October 2,
2021
September 26,
2020
October 2,
2021
September 26,
2020
Numerator
Net income and comprehensive income$17,139 $40,474 $55,671 $82,449 
Denominator
Weighted-average shares outstanding — basic
95,955 92,489 95,610 90,929 
Effect of dilutive stock options3,156 6,666 3,762 7,022 
Effect of dilutive RSUs58 111 105 82 
Weighted-average shares outstanding — diluted (1)
99,169 99,266 99,477 98,033 
Earnings per share:
Basic$0.18 $0.44 $0.58 $0.91 
Diluted$0.17 $0.41 $0.56 $0.84 
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(1)We are required to include in diluted weighted-average shares outstanding contingently issuable shares that would be issued assuming the end of our reporting period was the end of the relevant PSU award contingency period. No PSUs were included in diluted weighted-average shares outstanding for the 13 and 39 weeks ended October 2, 2021 and September 26, 2020.