Savers Value Village, Inc.

Please note that this call is being recorded and a replay of this call and related materials will be available on the company's investor relations website. The comments made during this call and the Q&A that follows are copyrighted by the company and cannot be reproduced without written authorization from the company. Certain comments made during this call may constitute forward-looking statements which are subject to significant risks and uncertainties that could cause the company's actual result to differ materially from expectations or historical performance. Please review the disclosure on forward-looking statements, including in the company's earnings release and filings with the SEC for discussion on these risks and uncertainties. please be advised that the statements are current only as of the date and of this call. While the company may choose to update these statements in the future, it is under no obligation to do so unless required by applicable law or regulation. The company may also discuss certain non-GAAP financial measures. A reconciliation of each of these non-GAAP measures to the most directed comparable GAAP financial measures can be found in today's earnings and SEC filings. Joining from management on today's call are Mark Walsh, Chief Executive Officer, Jay Stavs, Chief Financial Officer, and Gibran Tenius, President and COO. Mr. Walsh, you may now go ahead.

Thank you for joining us today and for your interest in Savers. We had a strong third quarter and are pleased with our performance. Purchasing currency net sales increased 5%. Comparable store sales increased 3.7% on higher transactions. And despite a $1.5 million negative impact from foreign currency, We grew adjusted EBITDA by more than 6% to $91 million. Donations and supply of goods remained very strong in the quarter, and for the first time in Saver's 70-year history, we reached over 5 million members in our loyalty program, an increase of 10% over the third quarter last year. Our third quarter performance demonstrates our ability to deliver strong margin in EBITDA, underpinned by an operating philosophy that governs our unique vertically integrated company. Let me explain this a bit more. In the middle of 2019, Savers moved away from a volume-based operating paradigm to a data environment with one goal, maximizing EBITDA. We knew that by finding the optimal mix between price, cost, and turnover, we could drive improved profit margins and strong, sustainable cash flow. To do so, we refocused the organization around productivity measures and started more thoroughly analyzing data for every item we collected, processed, and sold. Unlike conventional retailers, we don't preorder products months in advance from a vendor or manufacturer. Instead, we accept donated goods on behalf of our nonprofit partners, and our cost of these goods is made up by two primary components. the price that we pay our nonprofit partners for the donated items themselves, and the labor costs we incur to collect, source, grade, and merchandise these items for sale. Labor is the biggest component of our cost of goods, and this accounts for roughly 60% of the total product costs. While we accept donated items every day, we have the ability to accelerate or decelerate our processing volumes based on the directional demand trends at retail. This does two things. First, it keeps our retail inventory levels in balance with demand. And second, it better matches our expenses to our sales, both of which help maximize productivity, EBITDA, and cash flow. The result has been more than a 700 basis point improvement in gross margin, and 1,000 basis point improvement in EBITDA margin from 2019 to 2022. An important driver of productivity unique to Thrift is a metric called sales yield. Sales yield is calculated by dividing retail sales dollars by the number of pounds processed in any given period on a currency neutral and comparable store growth basis. Sales yield was $1.50 in the third quarter. This was up from $1.42 in the third quarter last year and $1.08 in 2019. To put it simply, we are generating higher sales for every pound of product that we process, which is being driven by our productivity gains from structural changes made to the business. It is also a reflection of the strong trends we are seeing on the supply side of the business. Donations were very strong in the third quarter. On the demand side of the equation, we saw two different trends in the quarter. Demand for hard goods remained strong and consistent throughout the period, while demand for soft goods was strong in the first half of the quarter and moderated a bit in September. As a result, we stepped our soft goods processing volumes up in the first half of the quarter and down in the latter part of the quarter to align our expenses to revenue and deliver $91 million in adjusted EBITDA. With an average unit retail of under $5, our value proposition is strong. Clearly, value is an important dynamic in the consumer landscape. However, as everyone is very aware, the macro environment is uncertain right now, as inflation remains high on essential everyday items such as food and housing. With consumers managing their discretionary spending, we are monitoring both demand and processing very closely to align expenses with sales. and maintain profitability. Turning to new stores, in line with our expectations, we opened three new stores in the third quarter and are on track to open a total of 12 this year. We continue to target 22 new stores in 2024. As a reminder, our new stores generally take three to four years in Canada and four to five years in the U.S. to reach mature processing efficiency, donation volume, and retail demand. The new store classes of 2022 and 2023 are performing in line with expectations. There is a tremendous amount of white space in front of us. We are addressing that opportunity methodically. We continue to build the organizational muscle in accelerating the store cadence, and our early results provide bullish overtones to continued success. In conclusion, we feel good about our third quarter results. The quality and quantity of our donations and our ability to execute our business going forward. We have made significant structural changes to the business that allow us to maximize EBITDA through focusing productivity measures that align our inventory, processing levels, labor expenses with demand trends. We know this is very different from most other retailers, and it is why we are so confident in our ability to drive profitable growth at scale. I want to thank our dedicated and hardworking team members who execute the business and serve our customers every day. Our mission is to grow the reuse economy and make secondhand second nature, thereby benefiting people, planet, and profit. With that, I'll turn the call over to Jay to discuss our financial results.

Jay? Thanks, Mark. Before I begin, let me remind you that our IPO closed on July 3rd, and the related accounting for the transaction was recorded in our third quarter results. Specifically, we recorded $48.3 million of non-recurring stock compensation expense related to the IPO in the salaries, wages, and benefits line of the income statement. The stock comp expense obviously impacted our effective tax rate in the quarter as well, as this was not tax deductible. With that said, let me review our third quarter numbers. Net sales increased 3.8% to $392.7 million. On a constant currency basis, net sales increased 5%. Our sales growth was driven by a comparable store sales increase of 3.7% in new store openings. During the quarter, we saw the strongest demand in July and August, with somewhat softer sales trends in September. As we transition from summer to fall goods in September, we believe that the above normal temperatures in the US and Canada impacted our soft goods sales, and we moderated our processing levels accordingly. Sales of hard goods remained strong and consistent throughout the quarter. Looking at our sales by country, U.S. retail net sales increased 3.6% to $200.1 million, and comparable store sales increased 3.3%, driven by growth in transactions. Canada retail net sales increased 4.4% to $163.5 million, which included an unfavorable impact of foreign currency. Canada comparable store sales increased 4.3%, also driven by growth in transaction volume. We opened three new stores in the third quarter and a total of 12 new stores over the past 12 months, ending the third quarter with 321 stores. We are pleased with our new store performance, which is in line with our expectations and our underwriting model. Cost of merchandise sold as a percentage of sales was flat to last year at 40.3%. Higher labor and material costs were offset by lower freight expenses. Labor costs increased primarily from higher wage rates, growth in comparable store transactions, and an increase in the number of stores. Salaries, wages, and benefits expense increased to $116.1 million due primarily to the $48.3 million in IPO-related stock compensation expense. Excluding this expense, salaries, wages, and benefits was $67.8 million and declined as a percentage of net sales by 70 basis points to 17.3%. Increases in wages were more than offset by benefits of the self-checkout kiosks. SG&A as a percentage of sales was flat year over year and continued to be well controlled. Depreciation and amortization increased 18.6% to $15.9 million due to capitalized expenses related primarily to our strategic initiatives, including new stores, centralized processing centers, automated book processors, and self-checkout kiosks, as well as maintenance capex. Interest expense increased to $18.7 million, primarily due to overall higher interest rates on our debt. Net loss for the quarter was $15.6 million, or a loss of 10 cents per diluted share compared to net income of $15.5 million, or 11 cents per diluted share a year ago. Adjusted net income for the third quarter was $26.5 million, or 16 cents per diluted share. Adjusted EBITDA increased 6.3% to $91 million, and our adjusted EBITDA margin increased 60 basis points to 23.2%. Included in adjusted EBITDA is a foreign currency headwind of $1.5 million due to changes in currency rates. Turning to the balance sheet, we ended the quarter with $125.3 million in cash. For the first nine months of the year, we generated $104.4 million of cash from operating activities. We completed our initial public offering of 18.8 million shares at a price of $18 per share on July 3rd. Together with cash on hand, the company used the net proceeds from its IPO to redeem $55 million of notes and to repay $252.4 million of outstanding borrowings under the term loan facility, as well as accrued interest in premium under the term loan in the notes. These transactions resulted in a loss on extinguishment of debt of $10.6 million in the quarter. At the end of the third quarter, our total borrowings were $818.3 million, and our net leverage based on a trailing 12-month adjusted EBITDA was 2.2 times. Lastly, let me make a few comments about recent demand and processing trends and how we are thinking about our financial outlook for the remainder of the year. As Mark indicated, our business is very different than most retailers. We're constantly receiving goods through the form of donations to our charity partners in the stores and are able to manage our floor inventory levels and production expenses by adjusting processing to demand trends. This allows us to better align our labor expenses to sales and maintain profitability. We lowered processing in the back half of the third quarter based on some fluctuations in September for fall and winter soft goods that we believe were weather related. While we have seen a pickup in demand from the September lows where weather has normalized, the pickup has been modest and varied between markets. With the continued inflationary pressures and uncertainties in the broader macro environment, we believe it is prudent to take a measured approach and closely manage our processing levels to maintain profitability in the fourth quarter. We also note that the decreases in the Canadian dollar currency rate over the past three months adds an incremental headwind to sales in EBITDA in the fourth quarter. As a result, we are guiding our fourth quarter comparable store sales to a range of flat to plus 1% and our fourth quarter adjusted EBITDA to approximately $80 million. Our updated guidance assumes a lower Canadian dollar exchange rate of 0.725, which negatively impacts our fourth quarter sales and adjusted EBITDA estimates by approximately 6 million dollars and 1 million dollars respectively. For the full year 23, sales are now projected to be approximately 1.49 billion dollars as compared to the previous guidance of approximately 1.51 billion dollars. which includes the negative FX impact that we experienced in the third quarter and our revised FX impact in the fourth quarter from the lower exchange rates. Full year 23 adjusted EBITDA is still expected to be $320 million unchanged from previous guidance and once again inclusive of the revised FX impacts. Other guidance figures for the full year 23 are contained in the outlook section of the earnings release. A few additional items to keep in mind when modeling out quarters in full year. In the fourth quarter, we expect to incur IPO-related stock comp expense of approximately $21 million, which will be included in the salaries, wages, and benefits line on the P&L. This is non-recurring stock comp that will be excluded from adjusted EBITDA and adjusted net income. Our full-year net income guidance assumes an effective tax rate of 44%. Our GAAP effective tax rate will continue to move around in the next few quarters as a result of the application of IRS Section 162M as a public company as it relates to our IPO stock comp and the dividend-related bonuses paid in Q1, as well as foreign currency gains or losses associated with the term loan held in Canada. Our full-year adjusted net income guidance assumes a statutory tax rate of 29% and a foreign exchange rate of 0.725 for the Canadian dollar. Post-IPO, we had approximately 160.5 million shares outstanding, and we are estimating a full-year diluted share count of approximately 157 million shares.