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Cost of Goods Sold and Occupancy Expenses: A Detailed Breakdown

Our cost of goods sold and occupancy expenses encompass the costs associated with inventory sold during the period (after discounts and allowances), as well as shipping, handling, distribution, and supply chain costs (including expenses from our bulk food repackaging facility), purchasing costs, shrinkage costs, third-party delivery fees, and store occupancy expenses. Occupancy costs include rent, common area maintenance, and real estate taxes. The depreciation expense included in the cost of goods sold pertains to the depreciation of assets directly utilized at our bulk food repackaging facility. It's important to note that our cost of goods sold and occupancy expenses may differ from those of our competitors, and therefore, the data presented in this Form 10-K may not be directly comparable to similar information provided by other companies. As new stores mature and sales rise, occupancy costs as a percentage of net sales typically decrease. Rent payments for leases classified as finance lease obligations are not included in the cost of goods sold and occupancy expenses; instead, they are recorded as a reduction of related obligations and classified as interest expenses.



Gross Profit and Gross Margin Analysis



Gross profit is derived by subtracting our cost of goods sold and occupancy expenses from our net sales. Gross margin, expressed as a percentage of net sales, indicates the proportion of revenue that exceeds the cost of goods sold. Fluctuations in gross margin can be influenced by changes in retail pricing, product costs, occupancy expenses, and the mix of products sold, as well as the rate at which we open new stores.



Store Expenses: Understanding Operational Costs



Store expenses encompass various store-level costs, including salaries and benefits, share-based compensation, supplies, utilities, depreciation, advertising, credit card processing fees, and other operational expenses. The depreciation expense included in store expenses pertains to the depreciation of assets utilized at the stores, such as land improvements and fixtures. Additionally, store expenses account for any gains or losses recorded on the disposal of fixed assets, primarily associated with store relocations, as well as costs incurred during store closures. The majority of store expenses are labor-related, which we actively manage, and these costs tend to align closely with sales performance. Typically, labor-related expenses as a percentage of net sales are higher in new stores compared to established locations, as new stores require a minimum staffing level to maintain service quality despite lower sales volumes. As new stores increase their sales, their labor-related expenses as a percentage of net sales usually decline.



Administrative Expenses: A Closer Look at Overhead Costs



Administrative expenses encompass home office-related costs, including salaries and benefits, share-based compensation, office supplies, hardware and software expenses, depreciation and amortization costs, occupancy expenses (such as rent and utilities), professional services fees, expenses related to our Board, and compliance costs associated with regulations governing publicly traded companies. The depreciation expenses classified as administrative expenses pertain to assets utilized at the home office, including land improvements and technology.



Pre-Opening Expenses: Initial Costs for New Stores



Pre-opening expenses incurred for new store openings and relocations/remodels may include rent, salaries, advertising, supplies, and other miscellaneous costs leading up to the store's opening. Generally, rent expenses are incurred one to four months prior to the opening date for store leases classified as operating leases. For finance leases, pre-opening interest and depreciation expenses are recognized. Other pre-opening costs may arise during the 60 days before the store opens. Certain advertising and promotional expenses related to new store launches may be incurred both prior to and following the store's opening. All pre-opening costs are recognized as expenses when incurred. Pre-opening expenses for remodels are recorded if the store is closed due to the renovation.



Interest Expense: Managing Debt Obligations



Interest expense comprises interest costs associated with finance lease obligations, net of capitalized interest, as well as expenses related to our Credit Facility.


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Income Tax Expense: Accounting for Tax Liabilities



Income taxes are accounted for according to the provisions of Income Taxes (ASC 740). We recognize deferred tax assets and liabilities based on future tax implications arising from discrepancies between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. These deferred tax components are measured using enacted tax rates expected to apply to taxable income in the years when temporary differences are expected to be resolved. Changes in tax rates impact deferred tax assets and liabilities, and any adjustments are recognized in income during the period of enactment. Valuation allowances may be established as necessary to reduce deferred tax assets to realizable amounts. Income tax expense also includes excess tax benefits and deficiencies related to restricted stock units.



Results of Operations: Analyzing Our Financial Performance




The table below illustrates key components of our financial results expressed as a percentage of net sales for the periods presented:


                                             Year ended September 30,
                                           2022         2021        2020
Statements of Income Data:*
Net sales                                    100.0 %     100.0       100.0
Cost of goods sold and occupancy costs        72.0        72.3        72.7
Gross profit                                  28.0        27.7        27.3
Store expenses                                22.2        22.2        21.9
Administrative expenses                        2.9         2.7         2.6
Pre-opening expenses                           0.1         0.1         0.1
Operating income                               2.8         2.7         2.7
Interest expense, net                         (0.2 )      (0.2 )      (0.2 )
Income before income taxes                     2.5         2.5         2.5
Provision for income taxes                    (0.6 )      (0.5 )      (0.5 )
Net income                                     2.0 %       1.9         1.9


 __________________________

*Figures may not sum due to rounding.



Other Operating Data (Unaudited):
Number of stores at end of period                    164              162              159
Store unit count increase period over
period                                               1.2 %            1.9              3.9
Change in daily average comparable store
sales                                                2.6 %            0.7   
          12.0
Number of new stores opened during the
period                                                 3                3                6
Number of stores relocated/remodeled
during the period                                      2                5                2

Gross square footage at end of period(1)       2,688,589        2,649,532  
     2,599,649
Selling square footage at end of
period(1)                                      1,742,623        1,719,813        1,687,196




(1) Gross square footage and selling square footage at the end of the period
include all stores that were operational as of the end of the fiscal year presented.



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Year ended September 30, 2022 compared to Year ended September 30, 2021
The table below summarizes our operational results and other key data for the specified periods, with all figures in thousands:
                                             Year ended September 30,               Change in

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