Grocery Outlet Tops Q2 Targets as Treasure-Hunt Strategy Starts to Click
Grocery Outlet Holding Corp. (NASDAQ: GO) beat its own second-quarter targets as the discount retailer's push to sharpen its opportunistic buying model and improve store execution began to show up in customer traffic, margins and category trends.
Net sales rose 1% year over year to $1.19 billion for the period ended July 4, 2026. Comparable-store sales declined 0.3%, a 70-basis-point improvement from the first quarter and well ahead of the 1.5% to 2.0% decline the company had projected. CFO Ian Ferry said the figure also included an estimated 50-basis-point headwind from the Easter calendar shift.
Traffic increased 1.8% during the quarter, while average basket size fell 2.1%. Basket performance improved by roughly 100 basis points sequentially, and CEO Jason Potter said shoppers were responding to a broader, more visible assortment of opportunistic merchandise. In company parlance, that is the Treasure Hunt inventory that separates Grocery Outlet from conventional grocers.
The progress was not uniform, but the direction was clear. Opportunistic comparable sales improved by more than 500 basis points from the start of the first quarter through the second quarter, according to Potter, and the opportunistic mix expanded by more than 300 basis points. The grocery category, the company's largest, posted a 3.5% comparable-sales gain.
Gross profit was flat at $360.7 million, and gross margin fell 30 basis points year over year to 30.2%. That was still above the company's guidance range of 29.8% to 30.0%. The yearly decline reflected promotions introduced earlier this year to reinforce value perception, plus markdowns and write-offs tied to store closures. Better inventory management partly offset the pressure. Sequentially, gross margin rose 60 basis points, helped by less liquidation activity, lower promotional spending and seasonal factors.
SG&A expenses rose less than 1% to $339.5 million and held steady at 28.5% of sales. The quarter also included $5.4 million in net restructuring charges from the company's store optimization plan.
Net income came in at $5.6 million, or $0.06 per diluted share, compared with $5.0 million, or $0.05 per diluted share, a year earlier. Adjusted net income was $20.3 million, or $0.20 per diluted share, versus $22.8 million, or $0.23, in the prior-year period. Adjusted EBITDA slipped to $65.7 million, or 5.5% of sales, from $67.7 million, or 5.7%, but Ferry said both adjusted EBITDA and adjusted EPS exceeded internal forecasts.
Grocery Outlet exited the quarter with $74 million in cash, roughly $154 million of availability under its revolving credit facility and $505.6 million in total debt, net of issuance costs. Net leverage was 1.8 times adjusted EBITDA.
Management reiterated that its central goal is to return to sustainable comparable-sales growth by leaning harder into opportunistic product. That shift is already affecting shelf space: during the first half, the company discontinued 400 to 500 made-to-order and private-label items to make room for a wider range of deals. The same approach is being applied to deli and frozen, where Grocery Outlet has expanded its branded opportunistic assortment.
The company also brought back Paul Miller, a 25-year veteran, as executive vice president and chief purchasing and merchandising officer. Potter said supplier relationships are improving, with new supplier acquisition up about 11% this year.
The promotional calendar is set to ease in the second half as opportunistic product availability improves. Grocery Outlet still expects about $20 million in incremental promotional investment for the full year, but the spending should taper further and be largely complete by the end of the third quarter. Ferry's take on those investments was blunt: “The customer doesn't really understand the distinction between a promoted branded item or op. They just see deals.”
On the store side, the company has closed 36 underperforming stores as part of its store optimization plan and remains on track to eliminate a $12 million annualized adjusted EBITDA drag, with most of the benefit expected in 2027. During the second quarter, Grocery Outlet opened 10 stores and closed 12. For the full year, it expects 30 to 33 net new store openings. Management said 2027 openings will be weighted toward infill markets as it focuses on returns, site selection and first-year store productivity.
The company also expects to complete roughly 100 store refreshes by the end of the year, although Potter said the program has been adjusted to shorten disruption periods after seeing more variability than desired in recent refresh cohorts.
Grocery Outlet is also spending on operator support, including store-level customer feedback reporting, more field coaching and a dynamic-routing program designed to improve delivery quantities and opportunistic-product flow. The routing system is active in about 200 stores and should be rolled out across the broader fleet over the next year.
The one fresh caution flag came from a multi-state Cyclospora outbreak. Grocery Outlet said none of its products were involved in recalls, but the outbreak is hurting produce sales. The company expects it to reduce third-quarter comparable-store sales by roughly 100 basis points and to create elevated produce shrink. Potter said the impact should moderate in the fourth quarter.
For the third quarter, the company guided to comparable-store sales of negative 1% to flat, gross margin of 29.8% to 30.0%, adjusted EBITDA of $58 million to $61 million and adjusted diluted EPS of $0.14 to $0.16.
For the full year, Grocery Outlet now expects net sales of $4.7 billion to $4.72 billion, comparable-store sales ranging from negative 0.5% to flat, adjusted EBITDA of $225 million to $235 million and adjusted diluted EPS of $0.50 to $0.55. Capital expenditures, net of tenant improvement allowances, are expected to be $170 million. The company raised the low end of several full-year outlook ranges after its second-quarter outperformance.
The report leaves investors with a clearer picture of a turnaround that is still in its early stages. Grocery Outlet's model depends on finding deals and passing them along with a sense of surprise; when the inventory is less distinctive, the chain loses some of its edge. The second-quarter data suggest the edge is sharpening, but the Cyclospora outbreak and the planned reduction in promotional spending are two reminders that the back half will not be a straight line.
Grocery Outlet Holding Corp. is a specialty discount retailer that buys excess inventory, closeouts and overstocks from manufacturers and distributors and sells those products at deep discounts. The company is headquartered in Emeryville, California, and operates more than 400 stores under the Grocery Outlet and Fresh2Go banners. Its assortment includes fresh produce, meat, dairy, bakery items, household staples, natural and organic products and select specialty items.