Savers Value Village, Inc.

Good afternoon and welcome to Saver's Value Village conference call to discuss financial results for the third quarter ending September 28, 2024. 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 author relations 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 of 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 regulations. 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 SDC filings. Joining for management on today's call are Mark Walsh, Chief Executive Officer, Drew Brentanus, President and Chief Operating Officer, Michael Mayer, Chief Financial Officer, and Ed Garuma, Vice President of Investor Relations and Treasury. Mr. Walsh, you may begin the conference.

Thank you and good afternoon, everyone. We appreciate you joining us today. Let me start by giving you a few highlights of our third quarter performance and then talk about the things we're doing to drive the business forward. The overall trends we saw in the third quarter were within the range of our expectations. Our U.S. business remained steady and continued to generate positive comp sales growth, driven by increases in both transactions and average baskets. Our Canadian business continues to be impacted by the challenging macro environment, with comp sales trends softening further early in the quarter for modestly improving more recently. We opened nine new stores in the quarter, and we are on track to deliver against our target of 29 new stores this year. We also gained momentum on our new store opening plans for 2025. As a class, our new stores continued to perform well with sales and earnings that exceeded our expectations. We also continued to see solid growth in our loyalty program with double-digit percentage growth in active members in both the U.S. and Canada over the last year. Loyalty members accounted for 72% of our total sales in the quarter, up from 70% last year. Finally, the resilience of our business model allowed us to generate $82 million of adjusted EBITDA on the quarter for more than 20% of sales. The macroeconomic environment in Canada remains challenging with 6.5% unemployment and a rising cost of living that is especially hard on low-income consumers. While these factors have a lot to do with the sales trends we are seeing in Canada, we are not satisfied with our performance there. We have been actively testing different approaches to improve our Canadian business, particularly in the areas of selection and pricing. In our business, selection is a function of donations, processing levels, and the product we put on the floor. We know that fresh new product is an important driver of the business, but at the same time, we strive to align our processing and inventory levels with demand trends. Late in the second quarter and through the first two months of the third quarter, we pulled back on processing levels in response to softer demand in Canada. It's always a balancing act, but in hindsight, we believe we pulled back too far, which caused our sales trends to decelerate further. We began rebalancing at higher levels of production in September, and since then, we have seen modest improvement in our Canadian sales trends as a result. On the pricing side, we continue to test a number of different pricing and discounting approaches. We believe our overall value proposition is strong. That said, we recognize we have opportunities to sharpen price points in select categories and markets and believe this could help drive stronger sales. We continue to closely monitor this in the context of the competitive and macroeconomic landscape and make further adjustments as necessary. We are acting nimbly to navigate this challenging Canadian macroeconomic environment. We will continue to deliver a strong consumer value proposition while remaining focused on driving consistent and profitable long-term growth. While we continually work to optimize selection and pricing in the short term, we are also thinking about longer-term opportunities to better utilize data and technology to drive further improvements. In both the U.S. and Canada, we've built a culture of innovation with successful deployment of centralized processing, automated book processing, and self-checkout. These capabilities are now firmly embedded in our business. By the end of this year, centralized processing will support 67 stores. Automated book processing will support 160 stores. And self-checkout is rolled into nearly all of our stores. We believe these kinds of innovations will help us drive long-term profitable growth. This quarter marked the beginning of what we expect to be a long-term new store growth era for our company. We opened nine new stores. We will open nine more in the fourth quarter. We also made additional progress in our new store expansion plans for 2025, and we now expect to open 25 to 30 new stores, a further acceleration from our previous outlook. Drift is still highly fragmented in an emerging sector, particularly in the U.S. We are significantly under-penetrated in our existing U.S. markets, and have virtually no presence in major regions such as the South and the Southeast. Roughly 60% of our new store openings in 2025 will be in the U.S., and that percentage will continue to grow over time. Overall, we expect new stores to be the primary driver of high single-digit total annual sales growth over the long term. Critical to accelerating our new store growth is the expansion of our offsite processing capability. Our network of central processing centers and offsite warehouse facilities enable us to open stores and locations that for various reasons can't support onsite processing. This has proven to be a critical unlock for our new store growth plans, with more than half of our new stores going forward expected to utilize some form of offsite processing. As we continue to run more volume through this network and gain operational efficiencies, the cost per unit is declining. We expect this trend to continue, enabling more profitable long-term growth and making off-site processing an even more important competitive differentiator for us. I'm especially pleased that we were able to make such great progress against our strategic growth plans, even as we continue to navigate a challenging economic environment in Canada. We delivered an adjusted EBITDA margin above 20%, which speaks to the resilience of our business model and our team's disciplined focus on I am convinced our experience managing through this environment is making us a more dynamic company, which will serve us well as we enter a new phase of growth. In closing, let me thank our more than 20,000 team members for their work and dedication to the Savers family. Together, we are executing the business, controlling what we can control, and investing in our future. We know we have a tremendous opportunity in front of us, and I am more confident than ever in our long-term growth prospects and in our mission to make secondhand seconds. Now I'll hand the call over to Michael to discuss our financial performance and the outlook for the remainder of the year.

Thank you, Mark, and good afternoon, everyone. As Mark indicated, the overall trends that we saw in the third quarter were in the range of our outlook. The U.S. remained steady, and sales were in line with our expectations. Canada was a little weaker than expected, with sales at the lower end of our range. We opened nine new stores during the quarter, and we are on track to open 29 new stores for the year. We also effectively managed our costs and delivered an adjusted EBITDA margin of greater than 20% despite top line headwinds, further demonstrating the resilience of our financial model. Turning now to the income statement, total net sales increased a half a percent to $395 million. On a constant currency basis, net sales increased 1.2% and comparable store sales decreased 2.4%. In the U.S., net sales increased 6.2% to $212 million, and comparable store sales increased 1.6%, driven by growth in both transactions and average baskets. In Canada, net sales declined 7.1% to $152 million, and comparable store sales declined 7.5%, primarily driven by declines in transactions. A timing shift in the Canada Day holiday negatively impacted Canadian comparable store sales by approximately 100 basis points. Cost of merchandise sold as a percentage of net sales increased 300 basis points to 43.3%, with the increase reflecting the impact of new stores and deleverage on lower comparable store sales. As a reminder, Our new stores typically open at roughly half of their mature sales levels, resulting in lower profit margins in their first few years. As we accelerate our growth, new stores will be a headwind to profit margins in the short to medium term. However, this headwind will subside and become a tailwind as a growing number of new stores work their way up the maturity curve. New stores typically achieve profitability by year two. More importantly, investments in new stores are the highest returning use of our capital, generating returns well in excess of our cost of capital. As Mark indicated, we've made further progress on our store opening plans for 2025, and we now expect to open 25 to 30 new stores next year. Our 2025 new store opening plan will be more balanced throughout the year versus 2024's back-end weighted opening cadence. Investments in offsite processing are also impacting our cost of merchandise sold. Offsite processing entails additional activities and costs, including freight and overhead, resulting in pressure on our profit margins when we open a central processing center or other offsite facility and work through the initial ramp phase. As we increase throughput and improve productivity in these facilities, the cost per unit is declining. In our most mature CPCs in the US and Canada, Cost per unit is approaching the level of in-store processing. Our total cost of merchandise sold per pound process was 65 cents in the third quarter compared to 64 cents in the third quarter last year. Salaries, wages, and benefits expense was $74 million. Excluding IPO-related stock-based compensation, Salaries, wages, and benefits as a percentage of net sales decreased 70 basis points to 16.6%. The decrease was driven primarily by lower incentive compensation expenses. Selling general and administrative expenses as a percentage of net sales increased 50 basis points to 21.3%, primarily due to new stores and pre-opening expenses, partially offset by continued expense discipline. Depreciation and amortization increased 9% to $17 million, reflecting investments in new stores, central processing centers, and automated book processing systems. Interest expense decreased 17% to $15 million due to reduced debt and lower average interest rates. GAAP net income for the quarter was $21.7 million, or 13 cents per diluted share. Adjusted net income was $25.1 million, or 15 cents per diluted share. Third quarter adjusted EBITDA was $82 million, and adjusted EBITDA margin was 20.8%. U.S. segment profit was $43.8 million, down $8.5 million versus last year due primarily to new stores and pre-opening expenses. Canada segment profit was $45.4 million, down $11 million versus last year primarily due to comp store sales declines, new stores, and pre-opening expenses. Turning now to capital allocation. We remain committed to a disciplined approach that funds our growth and strengthens our balance sheet. As our business continues to generate strong cash flow, we will continue to repay debt and be opportunistic in returning capital to shareholders. We remain on track for 29 new stores this year and we expect operating cash flow to be more than sufficient to fund our capital expenditures. Our balance sheet remains strong with $138 million in cash and cash equivalents and a net leverage ratio of 2.1 times at the end of the quarter. We repurchased approximately 1.8 million shares of our common stock during the quarter at an average price of $9.86 per share. As of the end of the third quarter, we had approximately $29 million remaining on our share of purchase authorization. Finally, let me discuss our updated outlook for 2024. Based on our third quarter results and the continued macroeconomic headwinds in Canada, we are narrowing our outlook ranges for the full year to the following. Total net sales to a range of $1.53 billion to $1.54 billion. Comparable store sales to a range of down 1% to flat, with the U.S. up low single digits and Canada down low to mid single digits. Net income to a range of $44 million to $49 million. Adjusted net income to a range of $81 million to $86 million. And adjusted EBITDA to a range of $290 million to $300 million. Our full year 2024 outlook remains unchanged for new store openings. We are still expecting a total of 29 new stores this year, which includes 22 organic openings and the seven acquired Two Peaches locations. We closed two stores with expiring leases in the third quarter, bringing net new store growth for the year to 27. Finally, capital expenditures are planned in the range of $105 million to $115 million. Just a few final details. Our outlook for net income assumes an effective tax rate of approximately 34%. And based on our share repurchase activity to date, we are now projecting weighted average diluted shares outstanding to be approximately 167 million for the full year. This does not contemplate any potential future share with purchases. This concludes our prepared remarks. We would now like to open the call for questions. Operator?