Savers Value Village, Inc.

the Savers Valley Villages conference call to discuss financial results for the fourth quarter ending December 30, 2023. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. 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 results to differ materially from expectations or historical performance. Please review the disclosure on forward-looking statements included in the company's earnings release and filings with the SEC for a discussion on these risks and uncertainties. Please be advised that statements are current only as of the date of this call, and 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 directly comparable GAAP financial measure can be found in today's earnings release and SEC filings. Joining for management on today's call are Mark Walsh, Chief Executive Officer, Jay Stavs, Chief Financial Officer, and Eubren Tanius, President and COO. Mr. Walsh, you may go ahead, sir.

Thank you for joining us today and for your interest in Savers Value Village. We finished 2023 on a strong note and are pleased with the underlying performance and resiliency of our business. In the fourth quarter, constant currency net sales increased 4.5%, comparable store sales increased 2.6%, and we grew adjusted EBITDA to $83 million. We believe our results once again demonstrate the power of our vertically integrated model, which allows us to align our processing levels with demand levels to generate strong profitability and cash flow. As we have previously discussed, unseasonably warm temperatures created some softness in the demand for apparel in the first half of the fourth quarter. This reversed as the quarter progressed, with trends getting progressively better. The fourth quarter capped off a very important year for Savers and one in which we generated strong financial results while continuing to invest in people, processes, and technology to drive productivity and position us for accelerated growth. We are proud of our achievements in 2023, which included $1.5 billion in revenue and over $322 million in adjusted EBITDA, $175 million of cash from operations, the opening of 12 new stores, the growth of our customer loyalty program to over 5 million members, the completion of our self-checkout and in-store signage rollout, the opening of three centralized processing centers, including the first two in the United States, and, of course, the completion of our initial public offering, all while diverting hundreds of millions of pounds of reusable goods away from North American landfills. Fueled by strong secular trends, the reuse economy and thrifting community are growing, and this is driving strong donation volumes and increasingly diverse customer base for savers. We recently completed our latest thrift industry survey, and the results continue to demonstrate the growing popularity of thrift. In the past year, nearly 90% of consumers have engaged in the thrift cycle as a shopper, donor, or both. One in four consumers report they have or will increase their spend at thrift stores, citing a variety of reasons, including value, fun, and a unique sense of style. Six in ten Gen Z consumers say that more than a quarter of their wardrobe is secondhand. Ultimately, consumers are more focused on value, quality, and their unique style than they were a few years ago. With a 70-year operating history and a business that is 10 times larger than our next largest for-profit thrift competitor, we are using our size and scale to further differentiate ourselves in a fragmented industry that has historically lacked innovation. Thrifters want a well-merchandised mix of value and selection in a brick-and-mortar setting. To that end, our stores are conveniently located, bright, well-organized, and easy to shop. We turn our inventory over 15 times a year, with an average store putting out 35,000 new items on the floor every week. And we continue to drive supply through conveniently located and efficient donation locations. With the investments we have made over the last few years that demonstrated margin stability of our business and our strong unit economics, we are well positioned to accelerate our growth. whether organically or through acquisition, our number one growth initiative is to expand our store base. We will stay disciplined and grow our store footprint at the right pace in locations where we have done the analysis from both a donor and a shopper standpoint. In 2023, we began our multi-year plan to accelerate unit growth, and we opened 12 new stores. This year, we plan to open up 22 new stores. And in 2025 and beyond, we will plan to expand our unit growth even further to reach the high single-digit percentage range. The new store classes of 2022 and 2023 are performing well, in line with our expectations, and we are building a robust pipeline of future stores. With exceptional cash flow generation, we also continue to strengthen our balance sheet, as Jay will detail in a moment. In conclusion, Savers delivered strong fourth quarter and full year results. and we feel good about the underlying fundamentals of our business. While the macro environment remains a bit uncertain and consumers continue to manage their discretionary spending, our average unit retail of around $5 offers an exceptional value proposition that positions us well. 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 will turn the call over to Jay to discuss our financial results.

Jay? Thanks, Mark. We are very pleased with the underlying trends and our results in the fourth quarter and full year. As Mark mentioned and we previously reported, we saw some early impact from weather, but demand trends accelerated as the quarter progressed, and the month of December was very strong. We managed our processing levels accordingly and delivered better than expected sales and adjusted EBITDA. Let me take you through our fourth quarter results. Net sales increased 4.4% to $382.8 million. On a constant currency basis, net sales increased 4.5%. Our sales growth was driven by a comparable store sales increase of 2.6% and new store openings. Increased transactions drove the comp increase and the average basket was down very slightly on a consolidated basis. In the United States, net sales increased 3.9% to $199.5 million. Comparable store sales increased 3.1%. The increase was driven by growth in transactions and, to a lesser extent, baskets. In Canada, net sales increased 4.6% to $155.4 million. This included a $600,000 unfavorable impact from foreign currency. Comparable store sales increased 2.0%. The increase was driven by growth in transactions, partially offset by a modest decline in average basket. We opened five new stores in the fourth quarter, with three of these in the United States and two in Canada. For the full year, we opened 12 new stores in line with our plan. At year end, we had 326 stores, with 155 of these in the U.S., 159 in Canada, and 12 in Australia. Our new stores are ramping well and performing in line with our expectations and our underwriting model. Cost of merchandise sold as a percentage of net sales decreased 70 basis points to 42%. The 70 basis points decrease was driven primarily by lower material and other processing costs, which was partially offset by higher labor costs. We processed 250 million pounds of goods in the quarter and generated a sales yield of $1.54. This compares with 234 million pounds processed and a sales yield of $1.51 in the fourth quarter last year. On-site and green drop donations represented 71.6% of pounds processed in the quarter versus 71.5% in the year-ago quarter. Salaries, wages, and benefits expense increased 21.9% to $90.1 million due entirely from stock-based compensation. Stock-based compensation was $21.6 million in the quarter. Of this amount, $20.8 million related to the IPO. Excluding the IPO-related stock-based compensation, salaries, wages, and benefits was $69.3 million and declined as a percentage of net sales by 210 basis points to 18.1%. The decline was driven by decreased incentive compensation and productivity improvements from the self-checkout kiosks that we installed primarily in 22 and 23, partially offset by an increase in our average wage rates. Our SG&A remains very well controlled. SG&A as a percentage of sales increased 30 basis points to 20.6%, driven primarily from increased credit card fees and IT costs. Depreciation and amortization increased 2.6% to $16.1 million, and interest expense decreased 6.9% to $17.6 million. Gap net income for the quarter was $43.9 million and included a $31.3 million non-cash tax benefit related to the legal entity consolidation of Second Avenue. Adjusted net income for the fourth quarter was $25.4 million, or 15 cents per diluted share, compared to $26.9 million, or 18 cents per diluted share, respectively, in last year's fourth quarter. Adjusted EBITDA increased 5% to $83.1 million, and our adjusted EBITDA margin increased 10 basis points to 21.7%. Turning to the balance sheet, we ended the fourth quarter with $180 million of cash and cash equivalents. For the full year, we generated $175 million of cash from operating activities. At the end of the fourth quarter, our total borrowings outstanding were $817 million, and our net leverage based on a trailing 12-month adjusted EBITDA was 2.0 times. Subsequent to the end of the fourth quarter, we've taken additional steps to further strengthen our balance sheet. First, in late January, we amended our senior secured credit agreement. The amended agreement plus a corresponding upgrade of our debt rating by Moody's lowers our borrowing rate spread by 175 basis points. Second, in early March, we paid down $49.5 million of principal on our senior secured notes. In addition, we are looking to monetize our interest rate swaps and cross-currency hedges in the coming weeks, which will generate approximately $35 million of cash proceeds, further enhancing our liquidity position. Lastly, let me conclude with some commentary around our initial outlook for 2024. We feel very good about the underlying fundamentals of the business. As Mark mentioned, there is some uncertainty in the overall environment, and consumers continue to manage their discretionary spending, so we think some level of cautiousness in our initial guidance is prudent. Our January sales were negatively impacted by severe winter weather in some of our key markets, but we've seen an acceleration in comp trends through February and early March and are encouraged by the trajectory of our business. Our initial fiscal year 24 outlook is for comparable store sales to increase in the range of 2% to 3%, in line with previous communications where you're planning to open 22 new stores in 24. Our comp outlook combined with the number and timing of new store openings gets to a full year revenue outlook of $1.57 to $1.59 billion. The continued investment in wages and the higher number of new store openings is expected to put modest pressure on gross margin this year, but most of this is expected to be offset with better leverage over fixed expenses. As a result, we think both gross margin and total operating expenses as a percent of sales should be flat to slightly down, resulting in adjusted EBITDA margin also being flat to slightly down this year. The last component to highlight around the shaping of our initial 24 outlook is our vertically integrated model and ability to align processing and labor levels with short-term fluctuations in demand. As we have discussed, this is something that separates us from most other retailers and gives us confidence in achieving our bottom-line targets, despite the potential for modest variability in our top line. As a result, we are initially guiding to a full-year adjusted EBITDA number of $340 million, rather than a range. A few additional comments to help with the building of models. The timing of our new store openings will be back-end weighted, with approximately 3 in the first half and 19 in the back half of the year. The first quarter represents our most challenging year-over-year same-store sales comparison, with a 7.2% comp last year that was driven by a 9% comp in Canada and a 5.6% comp in the U.S. The early portion of this year's first quarter was impacted by the holiday calendar shift and store closures and disruptions from the extreme weather in January. We estimate the weather disruptions in January and holiday calendar shifts will be an approximately 150 basis point headwind of first quarter comparable store sales growth. Similar to what we saw in the fourth quarter, we've seen increasingly positive trends as the quarter has progressed, and March is typically our largest volume month of the quarter. Given the strong comparable store sales growth in last year's first quarter, negative impacts from January weather, and the holiday calendar shifts this year, we would expect first quarter comparable store sales of approximately 0 to 1 percent, net sales of approximately 350 to 355 million dollars, and adjusted EBITDA of approximately 60 to 61 million dollars. As a reminder, our year-over-year quarterly same-store sales comparisons get progressively easier as the year progresses. The amendment of our credit agreement in late January and the pay down of $49.5 million of debt in early March is expected to reduce our annual interest expense by approximately $10 million. This annual savings will be partially offset by increased interest expense associated with the expected monetization of our IR swaps. As a result, we are projecting interest expense of approximately $78 million for the year. Lastly, our GAAP Net Income Guidance assumes an effective tax rate of 31%. That concludes our prepared remarks. We would now like to open the call for questions.