Savers Value Village, Inc.

Good afternoon and welcome to Saver's Value Village conference call to discuss financial results for the second quarter ending June 28, 2025. At this time, all participants are in listen-only mode. Later, we'll 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 copyright 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 risk and uncertainties that could cause the company's actual results to differ materially from expectations or historical performance. Please review the following disclosures of the forward-looking statements included in the company's earnings release and filings with the SEC for a discussion of these risks and certainties. Please be advised that these statements are current only as of the date of this call, and while the companies 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 direct comparable GAAP financial measures can be found in today's earnings released in the SEC filings. Joining from management on today's call are Mark Walsh, Chief Executive Officer, to Brent Tanyas, President and Chief Operating Officer, Michael Mayer, Chief Financial Officer and Ed Aruma, Vice President of Investor Relations and Treasury. Mr. Walz, you may go ahead, sir.

Thank you and good afternoon, everyone. We appreciate you joining us today. We are very excited about our second quarter results, which reflect our strong execution and serve as another proof point that our sharp value and compelling assortment resonates strongly with our consumers. Let me start with a few highlights from the quarter. Sales in our U.S. business grew 10.5%, with comp store sales up 6.2%, driven by both transactions and average basket. These results underscore the long-term growth opportunity in front of us. In Canada, our business continues to make progress in 2025, delivering 2.6% comp store sales growth, an acceleration of 200 basis points from the prior quarter, marking a third consecutive quarter of sequential improvement. Despite a prolonged choppy Canadian macroeconomic environment, our Canadian consumer is responding favorably to our fresh assortment and strong value proposition. We opened four new stores in the quarter and now expect to open 25 new stores in 2025. As a class, our new stores continue to perform in line with our expectations delivering strong unit economics. We remain confident in our long-term store growth opportunity and a targeted 20% store-level contribution margin. Turning to our loyalty program, we reached a milestone with over 6 million total active members. Financially, we generated nearly $69 million of adjusted EBITDA in the quarter, or approximately 16.5% of sales. Finally, based on our first half results, we are raising our revenue and earnings outlook for 2025. Michael will provide additional details on our outlook in his remarks. Parsing our results by geography, let's start in the U.S., where our performance was especially strong. The team has been disciplined in execution, value selection, a really unique thrift environment. Consumers are responding as we continue to drive market share gains. The obvious question is which demographic is driving our growth? Is it trade down, secular tailwinds, or some combination? The data set we have compiled from our insight work tells us an interesting and compelling story. Based on our survey work, consumers are increasing their spend with us, driven by our value proposition and customer experience. In addition, over the last several quarters, our customer base has been getting younger and more affluent. with a growing propensity to shop with us that is not driven by their economic circumstances. This speaks to the powerful and durable secular trends driving higher adoption of thrift. Helping to fuel this further, our competitive field research indicates price gaps to discount retail between 40 and 70%. This is prior to any tariff impact. If upward pressure on new retail pricing intensifies, We believe that we have a unique opportunity to introduce new customers to the great value and shopping experience that Savers offers. We think value always wins. But value is even more important in an environment where consumers continue to stretch their dollars. In short, we believe near-term economic pressures are accelerating a longer-term secular tailwind that was already underway in the U.S., further highlighting a growth opportunity in front of us. We believe our exceptional treasure hunting experience, punctuated by a compelling combination of value and selection, serves all cohorts across the economic spectrum. In Canada, we led with a strong and compelling selection. The consumer responded well, as our basket growth is indicative of our delivery of value and selection. Our team has worked tirelessly using a data-driven approach to optimize our offering at the store level, and it is paying off for their third consecutive quarter of comp store sales improvement. All things considered, macroeconomic conditions were stable in Canada during the second quarter. And we have seen green shoots as election-related turbulence has settled down. However, unemployment and inflation remain elevated and consumer confidence is volatile amid ongoing trade and tariff uncertainty. That said, we are encouraged by consumer behavior to date as basket size and transactions have been trending favorably. We've seen sequential improvement across all regions. As indicated after the first quarter, we are far from declaring victory and still have work to do navigating a challenging economic landscape, but are pleased with the progress we continue to see in the business. Moving on to new stores, we are very excited about our accelerating square footage growth, which will be more US-centric going forward. We opened four additional new stores in the second quarter, and are refining our guidance to 25 new stores in total for 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. Given the ongoing momentum in our business, we are making near-term tactical investments. These investments are focused on initiatives to enable sustainable long-term growth. In Canada, higher production levels are improving and assortment, more great finds, drive more repeat visits. This investment in processing and selection has had a transitory impact to our Canadian profit margin, which we expect to normalize over the next few quarters. In the U.S., we accelerated our investment in the southeast, pulling forward our Plan 2 peaches rebranding and repositioning efforts, completing the conversion of all seven stores on an accelerated schedule. We continue to believe this modest investment will give us a beachhead for ongoing expansion into the region. Furthermore, we continue to embrace innovation and are exploring new technologies and processes to optimize our business performance. For example, after seeing strong financial returns in our rollout of automated book processing, or as we call it, ABP, we've now expanded ABP to supply nearly 50% of the fleet. I would like to conclude my remarks by thanking your more than 22,000 team members for their extraordinary performance thus far. which is reflected in our financial results. Without our people, we would not be in this position as we continue to pursue our mission of making secondhand second nature. The first half of 2025 has been a success as we have exceeded our expectations thus far. And while microeconomic pressures persist, I believe that strong execution, fresh assortment, and exceptional value positions us well. I'll now hand the call over to Michael to discuss our second quarter financial performance and the updated outlook for the remainder of 2025.

Thank you, Mark, and good afternoon, everyone. As Mark indicated, we had a strong second quarter. Total net sales increased 7.9% to $417 million. On a constant currency basis, net sales increased 8.5%, and comparable store sales increased 4.6%. We are especially pleased with our double-digit growth in the U.S. where net sales increased 10.5% to $229 million. Comparable store sales increased 6.2%, driven by both transactions and average basket. Our U.S. business continues to outperform our broader off-price retail peer group as we benefit from thrift adoption with a growing customer base that is trending younger and with higher household income. We are also encouraged by our continued sequential improvement in Canada. where net sales increased 3.4%. On a constant currency basis, Canadian net sales increased 4.7% to $157 million, and comparable store sales increased 2.6%, fueled by an increase in average basket and transactions. This reflects the initial benefits of our execution in Canada as consumers react favorably to our increased selection. Costs of merchandise sold as a percentage of net sales increased 270 basis points to 44.8%. The increase primarily reflects higher processing levels in Canada and the impact of new stores. Our rebalanced Canadian production levels are driving sales by providing a better selection to our customers while creating some short-term pressure on our gross margins. We anticipate improved flow through to the bottom line as demand continues to build. and production levels are optimized. These cost increases were partially offset by the favorable impact of year-over-year growth in onsite donations. OSDs plus GreenDrop accounted for 79% of supply versus 78% last year. Salaries, wages, and benefits expense was $87 million. Excluding IPO-related stock-based compensation, salaries, wages, and benefits as a percentage of net sales increased 30 basis points to 18.7%. The increase was driven primarily by new store growth and an increase in incentive compensation expenses. Selling general and administrative expenses increased 6% to $88 million, primarily due to growth in our store base. As a percentage of net sales, SG&A decreased 40 basis points to 21.2%. primarily due to continued expense discipline. Depreciation and amortization increased 20% to $21 million, reflecting accelerated amortization of certain acquisition-related intangible assets, investments in new stores, offsite processing, and information technology. Net interest expense increased 1% to $16 million, primarily due to the impact of unwinding our interest rate swaps last year, partially offset by reduced debt and lower average interest rates. Gap net income for the quarter was $19 million, or 12 cents per diluted share. Adjusted net income was $23 million, or 14 cents per diluted share. Second quarter adjusted EBITDA was $69 million, and adjusted EBITDA margin was 16.5%. U.S. segment profit was $49 million, up half a million dollars versus the prior year primarily due to increased profit from our comparable stores, partially offset by the impact of new stores and the two peaches conversions. Canada segment profit was $39 million, down $5 million versus the prior year period due to deleveraging of expenses as a percentage of sales, primarily associated with our efforts with Canadian production to build demand, as well as a weaker Canadian dollar. Our balance sheet remains strong with $71 million in cash and cash equivalents and a net leverage ratio of 2.5 times at the end of the quarter. We repurchased approximately 2.7 million shares of our common stock during the quarter. Of this total, 2.3 million shares were purchased at a weighted average price of $8.86 per share as a part of the secondary offering in May. We also purchased 0.4 million shares under our share repurchase authorization at a weighted average price of $8.17 per share. As of the end of the second quarter, we had approximately $2.8 million remaining on our share of purchase authorization. Finally, I'd like to discuss our updated outlook for the remainder of fiscal 2025. We have exceeded our expectations for the first half with strong U.S. comps and continued sequential improvement in Canada. New stores are meeting our expectations, putting them on track to begin contributing to profit growth in 2026, consistent with our previously stated goal. Our profit margins reflect the short-term tactical investments we're making in higher processing levels in Canada and accelerating the conversion of Two Peaches locations through our operating model. Additionally, a stronger Canadian dollar is contributing to better total sales results, but with limited short-term earnings impact due to hedging. Based on these factors and the momentum we're seeing in our business, we are raising our previously stated outlook for the year. Our updated full year outlook for 2025 now includes the following. Net sales of $1.67 billion to $1.69 billion. Comparable store sales growth of 3% to 4.5%. Net income of $47 million to $58 million, or 29 cents to 36 cents per diluted share. Adjusted net income of $67 million to $78 million. or 41 to 48 cents for diluted share. Adjusted EBITDA of $252 million to $267 million. Capital expenditures of $125 million to $140 million and 25 new store openings. Our outlook for net income assumes net interest expense of approximately $67 million and an effective tax rate of approximately 30%. For adjusted net income, we're assuming an effective tax rate of approximately 27%. I'd also like to briefly touch on the expected cadence of results for the third and fourth quarters. We expect sales growth in the third quarter to be roughly consistent with the second quarter, with total sales growth in the high single digit percentage range and comparable store sales growth in the mid single digits. We plan to open 10 new stores during the quarter. We expect fourth quarter total sales growth in the mid-teens percentage range, including the impact of the 53rd week, with comparable source sales growth in the low single digits as we begin to lapse stronger comparisons. We expect adjusted net income and adjusted EBITDA in dollars to be roughly balanced between the third and fourth quarters, with the fourth quarter slightly higher than the third quarter. This concludes our prepared remarks. We would now like to open the call for questions. Operator?