Savers Value Village, Inc.

Good afternoon and welcome to Savers Value Affiliates Conference Call to discuss financial results for the first quarter ending March 29, 2025. At this time, all participants are in the 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 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 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, Gibran Tanius, President and Chief Operating Officer, Michael Mayer, Chief Financial Officer, and Ed Iruma, Vice President of Investor Relations and Treasury. Mr. Walsh, you may go ahead, sir.

Thank you, and good afternoon, everyone. We appreciate you joining us today. Let me start by giving you a few highlights of our first quarter performance. and then talk about the things we are doing to drive the business forward. We are pleased with the overall trends we saw in the first quarter. Our U.S. business remained strong with nearly double-digit sales growth and healthy comps, given by increases in both transactions and average basket. Our Canadian business saw continued sequential improvement, and we are pleased to report positive Canadian comp for the first time since the fourth quarter of 2023. We will continue to focus our execution to provide a compelling selection at great value to our Canadian customers as they work to stretch their dollars in the current economic climate. We have two new stores in the quarter and remain on track to deliver our 2025 new store targets. As a class, our new stores continue to perform in line with our expectations, delivering strong unit economics. Our loyalty program also had strong growth, reaching nearly 6 million total active members at the end of the first quarter. Finally, we generated nearly $43 million of adjusted EBITDA on the quarter for approximately 11.6% of sales. The first quarter was highlighted by strong US trends and the return to positive comp in Canada. The US is our key growth market with significant white space opportunities. Beginning in 2025, Accelerating to 2026, the new store portfolio will be much more US centric to address this opportunity. In Canada, we still have work to do and macroeconomic conditions, while stable in the first quarter, remain challenging. Our strong execution is helping drive a fresh assortment and an exceptional value that resonates well with the Canadian consumer. Let me take a moment to talk about tariffs. which we know are subject of significant concern to the broader retail ecosystem. As a reminder, our model is hyperlocal. The bulk of our supply, which consists of donations collected on behalf of our charitable partners, comes directly sourced from a 10 to 12 mile radius around our store. This means we virtually have no direct exposure to tariffs, giving us a unique position in the retail apparel sector, which we believe is a key competitive advantage. With an AUR around $5 and almost no direct exposure to tariffs, we continue to offer a strong value to our customers. As part of our ongoing work on competitive pricing, we monitor our value proposition to ensure that we remain priced at a significant discount to traditional retailers, even before the effects of tariffs. On balance, macroeconomic conditions were generally stable in both the U.S. and Canada during the first quarter. Although we are mindful of volatility and consumer confidence in both countries, we are staying focused on what we can control, planning conservatively, and making our business stronger for the long term through continuous improvement and innovation. Given the nature of our operations, we are not required to order inventory from abroad. We can plan our business and production levels in much tighter windows than competitors in the retail industry. Looking ahead, we remain very excited about our accelerating square footage growth. We opened two new stores in the first quarter and are on track to open 25 to 30 new stores this year. New stores have been performing in line with our expectations and remain our first and best use of capital to drive growth and compelling returns. Moving on to centralized processing centers or CPCs. We recently opened our sixth CPC in Southern California slightly earlier than our previously communicated plans. The CPC will help power our growth in that market. As a reminder, some form of offsite processing will supply more than half of our new stores going forward. And as previously communicated, our offsite processing is a critical enabler of our accelerated unit growth. We are leveraging best practices across North America, enabling newer CPCs to scale more efficiently as we continue to make progress in converging onsite and offsite cost per unit. Furthermore, we continue to embrace innovation and are exploring new technologies and processes to optimize our business performance. We continue to roll out automated book processing after seeing strong financial returns. We've now expanded ABP support to 170 stores. In closing, we have been faced with a challenging and ever-changing environment, and I want to thank our more than 22,000 team members for their commitment, exceptional performance, and dedication to our customers. We've gotten 2025 off to a solid start. And while macroeconomic pressures persist in Canada, I believe that our strong execution, pressure assortment, and exceptional value positions us well for the current environment. I am more confident than ever in our long-term growth prospects and our mission to make secondhand second nature. I'll turn the call over to Michael to discuss our first quarter financial performance and the outlook for the remainder of 2025.

Thank you, Mark, and good afternoon, everyone. As Mark indicated, we are pleased with our results for the first quarter. Total net sales increased 4.5% to $370 million. On a constant currency basis, net sales increased 7.1%, and comparable store sales increased 2.8%. We are especially pleased with near double-digit sales growth in the U.S., despite consumer sentiment materially weakening year-to-date. We're also encouraged by our 310 basis point sequential comparable store sales improvement in Canada, resulting in positive comparable store sales for the quarter, even as the macroeconomic environment remained challenging. In the U.S., net sales increased 9.4% to $211 million. and comparable store sales increased 4.2%, driven by growth in both transactions and average basket. In Canada, net sales declined 4.1%, reflecting a weaker Canadian dollar. On a constant currency basis, Canadian net sales increased 2.2% to $137 million, and comparable store sales increased 0.6%, primarily driven by an increase in average basket. Cost of merchandise sold as a percentage of net sales increased 80 basis points to 45.5%, with the increase reflecting the impact of new stores partially offset by strong growth in onsite donations. OSDs plus GreenDrop accounted for 74% of supply versus 72% in the prior year period. This growth ensures that we have fresh and compelling product for our customers and helps drive strong margins. Salaries, wages, and benefits expense was $85 million. Excluding IPO-related stock-based compensation, salaries, wages, and benefits as a percentage of net sales increased 190 basis points to 20.5%. The increase was driven primarily by new store growth and an increase in incentive compensation expenses. Selling general and administrative expenses as a percentage of net sales increased 160 basis points to 23.6%, primarily due to growth in our store base, rent and utilities, and routine maintenance costs. Depreciation and amortization increased 6% to $19 million, reflecting investments in new stores, offsite processing, and information technology. Net interest expense decreased 8% to $15 million, primarily due to reduced debt and lower average interest rates. Gap net loss for the quarter was $4.7 million, or 3 cents per diluted share. Our net loss included a $2.7 million pre-tax loss on debt extinguishment. adjusted net income was $3.6 million, or two cents per diluted share. First quarter adjusted EBITDA was $43 million, and adjusted EBITDA margin was 11.6%. As we've previously mentioned, new stores are a headwind to adjusted EBITDA this year, as we have a substantial number of new stores which have not yet reached profitability compared to the prior year period. Our new stores typically achieve profitability by their second year of operations, As these new stores continue to mature, we expect the headwind to profitability to subside. U.S. segment profit was $39 million, down $1.6 million versus the prior year period, primarily due to new store growth and pre-opening expenses, partially offset by an increase in profit from our comparable stores. Canada segment profit was $25.3 million, down $9.4 million versus the prior year period, due primarily to the aforementioned weaker Canadian dollar and deleverage of expenses as a percentage of sales. Our balance sheet remains strong with $73 million in cash and cash equivalents. As we previously disclosed, we redeemed $44.5 million of our senior secured notes during the quarter, or 10% of the outstanding balance, leaving us with a net leverage ratio of 2.4 times at the end of the quarter. We repurchased approximately 1.4 million shares of our common stock during the quarter at a weighted average price of $8.43 per share. As of the end of the first quarter, we had approximately $6.3 million remaining on our share repurchase authorization. Finally, I'd like to discuss our outlook for the remainder of fiscal 2025. We're pleased with our results for the first quarter, although it's our smallest quarter of the year. Despite continued economic pressure and policy uncertainty, We remain confident in our ability to execute against our plans. We are therefore reaffirming our previous outlook for the year. As a reminder, let me reiterate some important context for our outlook. First, we're at an inflection point in our long-term growth strategy. Between our 2024 and 2025 openings, we will have approximately 50 stores in their first year of operation in 2025. On average, new stores generate approximately $3 million in sales in their first year. and achieve profitability by their second year. We therefore expect new stores to be a meaningful driver of revenue growth this year, but a net headwind of approximately $10 million to adjusted EBITDA in 2025. We expect an inflection in profitability by 2026 as these stores mature and drive both top and bottom line growth. Second, we continue to take a conservative approach to planning comparable store sales growth. With continued steady growth in the U.S., and a cautious approach in Canada. The Canadian economy had shown some signs of stabilization, but tariffs, while having almost no direct impact on our operations, have created additional uncertainty regarding consumer spending going forward. On a related note, our outlook for 2025 is based on an estimated exchange rate of 70 cents U.S. per Canadian dollar, which negatively impacts our year-over-year comparisons for sales by approximately 1.7 percentage points. and for adjusted EBITDA by approximately $6.5 million. Finally, 2025 is a 53-week fiscal year. We estimate the 53rd week will add approximately 1.5% to total sales growth with no significant impact on net income, adjusted net income, or adjusted EBITDA. There's also no impact on comparable store sales growth, which will be reported on a like-for-like 52-week basis. With that context in mind, our full year outlook for 2025 includes the following, 25 to 30 new store openings, net sales of $1.61 billion to $1.65 billion, comparable store sales growth of 0.5% to 2.5%, with the U.S. continuing to outperform Canada, net income of $36 million to $52 million, or 21 cents to 31 cents per diluted share, adjusted net income of $62 million to $77 million, or 37 cents to 46 cents per diluted share, adjusted EBITDA of $245 million to $265 million, and capital expenditures of $125 million to $150 million. Our outlook for net income assumes net interest expense of approximately $66 million and an effective tax rate of approximately 35%. For adjusted net income, we're assuming an effective tax rate of approximately 27%. I'd like to briefly touch on our expectations for the second quarter. We expect total sales growth in the second quarter to be roughly consistent with the first quarter in the low to mid single digit percentage range, driven by low single digit comparable store sales growth plus new stores partially offset by foreign exchange rate impacts. We plan to open four new stores during the quarter. We expect profit margins for the balance of the year to be higher than they were in the first quarter due to normal seasonality and the continued maturing of our new stores. For the second quarter, we expect adjusted net income and adjusted EBITDA margins to be slightly higher than our full year outlook for those margins. We will provide more color on the second half during next quarter's call, but in general, we expect comparable source sales growth to be higher in the third quarter than the fourth quarter due to the softer comparison last year. We expect adjusted net income and adjusted EBITDA to be roughly balanced between the third and fourth quarters. We plan to open roughly half of our new stores this year during the third quarter. This concludes our prepared remarks. We would now like to open the call for questions. Operator?