RJ Sheedy: So, no impact from private label, a small number of items rolling them out later in the year. So not meaningful to margin. From an opportunistic standpoint, I’d say, stable, which is favorable. Those nice trends that I talked about as they contributed in 2023, we expect to contribute similarly to gross margin in 2024. And then longer term, continue to operate this business for stable margins, always looking to — that back into value and driving customer trips, both acquisition and retention and frequency. And we continue to see some really nice trends there. So we like this balance that we have between the value that we’re delivering and of course, the margin that is being delivered to the P&L. So that continues to be the approach.
Operator: The next question we have comes from Michael Baker of D.A. Davidson.
Michael Baker : So the acquired companies EBITDA margins are about 5.5%, right? Pretty close to what you guys do, maybe a little bit below the 6.4% that you did this year, but on half the sales volumes. So if you can get those sales volumes even close to your core stores, what does that mean about the margins from United Grocery Outlet? Do they go that much higher? Or do you reinvest that to keep them at about that mid-6% range? It’s just — it seems interesting that their margins are not that far from you on somewhat to our sales.
Charles Bracher: Yes, Mike, it’s Charles. Probably, I’d say it is premature at this point given again we haven’t closed the transaction. The business, again, last year roughly $160 million in top line, EBITDA about $10 million. So really similar EBITDA margin profile to our business. As RJ said, really excited about the long-term growth potential for this business, but we do want to be really measured in our approach. And so it’s — it would just be premature for us to put a number to it. But the — again, the path we’re taking is integrate the business, make sure we protect what they have, combine the best of UGO and GO with the goal of continuing to operate the business really in steady state this year. We’ll start to invest.
Again, lots of ways we think we can drive growth. We’re going to learn a lot that will inform what exactly the P&L looks like in the future. But we do think there’s a big opportunity for growth and again, taking the best of what we do and what UGO does. We’re excited about it.
Operator: [Operator Instructions] The next question we have comes from Jeremy Hamblin of Craig-Hallum.
Jeremy Hamblin : Congrats on the strong results. I wanted to come back to the new unit development here and just understand in terms of where you are now in opening these stores at your — kind of your capital outlay in doing that versus where it might have been a couple of years ago? And then just thinking about that in context of the investments you’re making here in UGO deal? And then the — it looks like you — I think you had indicated there is an additional $15 million of capital improvements that you’re looking to make into the UGO locations. Can you just talk about in terms of returns on capital, are you getting more from kind of your base legacy business? And how does that compare to the United deal?
Charles Bracher: Yes. Jeremy, it’s Charles. Let me provide you a little bit of context to how we really thought about the returns for the acquisition. We do think this will generate healthy returns for us over time. And we really looked at it through a few different lenses. The first was just what’s the base business that we’re buying. So we think we’re paying a fair multiple for the 40 stores that exist today plus the distribution center just based on the last 12 months’ performance of the business. As we said, we think it will be modestly accretive to 2024 earnings. So that feels good. Beyond that, really the next lens was thinking about the opportunity we have to drive growth within the existing store base. So as you said, it will take time but as we integrate, as invest in the stores we think there’s meaningful upside just within the 40 stores today to drive accelerated growth, higher productivity, better bottom line that fuels the return.
And then lastly, again, it’s the platform that this gives us to accelerate growth into a new region. And RJ talked about not only the real estate opportunity in total that gives us, but also the impact it can have for us from a buying perspective. So those would all be additive to the way we thought about the return. So we think this is going to be a great use of capital for us and we love the way that it really supplements and complements what we do from an organic growth perspective.
Jeremy Hamblin : And then just a follow-up there. In terms of your existing stores, Grocery Outlet stores. Where does your kind of initial cash investment lie at this point in time? I think a few years ago, it was in the $2 million and change for the store build-out inventory preopening expense. We believe that’s a little bit higher now. Just wanted to sense here as you’re looking at FY ’25 and 6 of 100 total locations, what’s kind of the expected outlook related to?
RJ Sheedy: Yes, you’re exactly right. We are seeing higher CapEx costs today than we were really the $2 million number ties back to when we brought the business public in 2019. And so clearly, it’s a different inflationary environment today versus then. So yes, everything labor materials, equipment has had an impact. Probably in total, we’re seeing new store costs about 25% higher than where we were at the time of IPO. That said, we’ve got a number of levers that we’re actively working on to reduce costs, everything from value engineering. The build-out to strategic sourcing and both purchasing of equipment. I will say that when you look at the store model and the returns, it’s store volume and product profitability that have a much bigger impact on returns relative to CapEX and so continue to be pleased with the volumes and the profitability we’re driving from new stores.
And so while the recent vintages are seeing as higher construction costs, it is not weighing down our returns in a meaningful way. You can think about it as really having about a 5 point impact on sort of mature year for ROIC. So that’s come down from 35%, but still really a healthy, roughly 30% based on current construction cost.
Operator: The final question we have comes from Simeon Gutman of Morgan Stanley.
Simeon Gutman : Everyone luckily, our airtime has not expired yet. .
Christine Chen: We don’t know what happened with that one. We were just as appalled as you were apologies.
Simeon Gutman : No worries. I want to go back to the ticket size. I know it’s a bit of an enigma to look at same SKU inflation for your business. Is there a best guess on what that may be doing to the basket size versus we’re putting fewer items in the basket or if there’s some trade down happening? And then I’ll just put the follow-up in here, given the interest of time. Charles gave us some numbers on the fourth quarter and the first quarter commission sharing. I think you’ve disclosed the second and third or they’re in the filings, but if you can just give us that one more time because there’s going to be a pretty meaningful inflection in the composition of the P&L during the year.
Charles Bracher: Yes. Let me just start with Simeon, the basket. And so you can think about within the basket, again, not directly comparable for us. We always talk about our model mutes the inactive inflation on the way of deflation on the way down, but we are — we continue to see slightly higher average unit retails. That’s being offset by fewer items in the basket. Again, as trip frequency has increased as well as has had a bit of an impact from the system transition. Just to reiterate the numbers I provided with respect to the system EBITDA impact for Q4 and Q1. I’ll give you both numbers. So you have them again. For the fourth quarter, total EBITDA impact roughly $20 million about half of which is IO commission support.
So, as you look in the Qs and the Ks, you can — you’ll see that number as it relates to kind of the anomaly and commission trend. And the balance, again, the combination of sales impact and gross margin impact. For the first quarter, we’re seeing the monthly trend come down in terms of the impact. We expect the full first quarter EBITDA headwind to be roughly $14 million. Again, half of that being IO commission and sales and margin being the balance.
Operator: Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. And I would like to turn the call back to RJ Sheedy for closing remarks. Please go ahead, sir.
RJ Sheedy: Thanks, everyone, for your time today and we look forward to talking with you again on future calls. Appreciate it. Take care. .
Operator: Thank you. Ladies and gentlemen, that then concludes today’s conference. Thank you for joining us. You may now disconnect your lines.
