Savers Value Village, Inc.

Ladies and gentlemen, welcome to Savers Value Village's conference call to discuss financial results for the third quarter ending September 27, 2025. 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 and historical performance. Please review the disclosures 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 calls are Mark Walsh, Chief Executive Officer, Dubron 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. We are pleased with our third quarter results, particularly in the U.S., where our momentum remains strong. Comps continue to strengthen in Canada, but challenging macroeconomic conditions remain a headwind there. Let me start with a few highlights from the quarter. Sales in our U.S. business grew 10.5%, with comp sales up 7.1%, driven by both transactions and average basket. These results underscore our strong operational performance, as well as an accelerating secular thrift trend. Powerful results like these reinforce our enthusiasm for the long-term growth opportunity in the U.S. In Canada, our business made further progress, delivering 3.9% comp sales growth, an acceleration of 130 basis points from the prior quarter, marking the fourth consecutive quarter a sequential improvement. The Canadian macro environment remains very challenging, and we continue to lean into selection during the quarter while taking steps to better align production with demand trends going forward, which Mike will go over in more detail. We opened 10 new stores in the quarter and still 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 approximately 6.1 million total active members. Financially, we generated $70 million of adjusted EBITDA in the quarter, or approximately 16.4% of sales. Additionally, our strong cash flow generation and an attractive debt market allowed us to opportunistically refinance our debt, which will significantly reduce our interest expense and give us a more flexible capital structure. Just as a reminder, we do not have any direct impacts from tariffs. We continue to monitor price trends closely, and I feel very good about our competitive positioning and value gaps as new clothing and footwear pricing begins to increase in the U.S. Finally, based on our results year-to-date, we are tightening 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 momentum is especially strong. We are thrilled to post a 7.1% comp, which I will point out is coming from a mature store base, as the majority of our 2024 class will not begin to enter the comp base until the fourth quarter. This speaks to our compelling assortment at great value and the consumer-friendly shopping experience that we offer as well as the accelerating secular adoption of thrift. As we've noted in previous calls, we continue to see growth in our younger and more affluent customer cohorts. In Canada, the economy remains challenging, but it has not impacted everyone the same. For example, tariffs and trade tensions have disproportionately impacted certain regions, such as Southwest Ontario, a key market of ours where the automotive industry is a large portion of the local economy. Meanwhile, unemployment is above 7%, and the lower-income consumers have seen little or no disposable income growth, plus higher than average inflationary pressure in non-discretionary categories like food, shelter, and transportation. Against this backdrop, we are leading with a compelling selection which helped drive positive comps over the past year, although we do think that the near-term Canadian comp upside will be limited by macro pressure. Throughout the third quarter, we actively worked to calibrate production and meet demand, making careful and targeted adjustments in response to sales trends. Exiting the quarter, Canadian comps leveled off at the lower end of our expected range, and we continue to drive improved gross margins also at the lower end of our expected range. We remain laser-focused on giving our Canadian consumer great value through sharp pricing and compelling selection. We are controlling what we can control. and we will manage the Canadian business with the expectation that macro conditions may limit our growth in the near term. Moving on to new stores, we continue to be pleased with the results we are seeing. And as a whole, they are performing in line with our expectations. As new stores continue to mature as expected, they are beginning to contribute to an inflection in our profitability. We are especially pleased that our U.S. and Canadian segments did year-over-year profit growth this quarter for the first time since 2023. And we expect a return to profit growth at the enterprise level in the fourth quarter, putting us on track for our previously stated goal of annual profit improvement in 2026. We opened 10 new stores during the quarter and are on track to open 25 new stores in 2025. As the 2026 lease pipeline is starting to round out, we're expecting a roughly similar number of openings next year, but the focus of our new store growth going forward will even be more U.S.-centric. as we believe the secular adoption of thrift remains in the early innings, and we still have significant amount of geographic white space. To this end, we're excited to enter new markets in 2026, including North Carolina and Tennessee. Store growth remains the highest return and most important use of our capital, and we could not be more pleased to bring our compelling value proposition to more consumers throughout the U.S. Finally, we recently released our 2025 Impact and Sustainability which can be found on our investor relations website. We are a mission-driven business championing reuse and looking to inspire a future where secondhand is second nature. This report highlights the impact and circularity ingrained in our model, and I am proud that over the past five years, we have kept 3.2 billion pounds of usable items out of landfills and paid our charitable partners over $490 million. We hope you will take the time to review the report and our commitment to community impact, sustainability, and sound corporate governance. I would like to conclude my remarks by thanking our more than 22,000 team members for the hard work and commitment. As a team, we are more energized than ever as we see the fruits of our labor with more people choosing us every day, whether it be due to our treasure hunting experience, exceptional assortment of sharp value, or to contribute to the circular economy. 2025 continues to be a success. While macro pressures persist, I believe that our value proposition positions us well. Now I'll hand the call over to Michael to discuss our third 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 third quarter. Total net sales increased 8.1% to $427 million. On a constant currency basis, Net sales increased 8.6%, and comparable store sales increased 5.8%. We were especially pleased with our double-digit growth in the U.S., where net sales increased 10.5% to $235 million. Comparable store sales increased 7.1%, driven by both transactions and average baskets. We also saw our fourth consecutive quarter of sequential improvement in Canada. where net sales increased 5.1%. On a constant currency basis, Canadian net sales increased 6.1% to $161 million, and comparable store sales increased 3.9%, fueled by an increase in transactions in average baskets. While we are pleased with another quarter of positive comps, we believe that ongoing macro pressure places a near-term ceiling on Canadian comp store sales. Given the sluggish Canadian economy, we do not assume that conditions will change materially in the near term. Cost of merchandise sold as a percentage of net sales increased 80 basis points to 44.1% due to the impact of new stores and deleverage due to higher processing in Canada, partially offset by growth in onsite donations. Gross margins improved by roughly 100 basis points over the first half of the year And we materially narrowed the gap versus last year as we lapped new store growth. We expect this trend to carry into the fourth quarter as new stores continue to ramp. As Mark previously indicated, Canadian comp sales trends have leveled off at the lower end of our expected range, with a corresponding impact on gross margins as we worked to balance production levels throughout the quarter. 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 220 basis points to 18.8%. The increase was driven primarily by new store growth, an increase in annual incentive plan expense, and higher wage rates. Selling general and administrative expenses increased 19% to $100 million, and as a percentage of net sales increased 200 basis points. to 23.3%, primarily due to growth in our store base. SG&A expenses also included a $4 million impairment charge for the planned closure of six underperforming stores during the fourth quarter. This includes three of the two Peaches stores that we converted during the second quarter, whose post-conversion results were not meeting our expectations, along with one other store in the U.S. and two in Canada. We concluded the closure of these six stores would be EBITDA accretive in 2026, and we expect nearby stores to absorb much of the sales volume from the closed locations. Our store fleet remains healthy with almost all comp stores generating positive EBITDA. In addition to the impairment charge, SG&A also included $2.1 million of debt refinance costs and the year-over-year change in fair value of acquisition-related contingent consideration. Depreciation and amortization increased 6% to $18 million, reflecting investments in new stores. Net interest expense increased 12% to $17 million, primarily due to the impact of unwinding our interest rate swaps last year, partially offset by reduced debt and lower average interest rates. As we disclosed during the quarter, we took advantage of a strong market and refinanced our debt. As a result of the refinancing, We expect interest expense savings of approximately $17 million on an annualized basis. For modeling purposes, this translates to an estimated interest expense of $14 million for the fourth quarter and $52 million for fiscal 2026. We incurred a $33 million loss on extinguishment of debt as part of the refinancing. Gap net loss for the quarter was $14 million, or 9 cents per diluted share. Adjusted net income was $22 million, or 14 cents per diluted share. Third quarter adjusted EBITDA was $70 million, and adjusted EBITDA margin was 16.4%. U.S. segment profit was $48 million, up $3 million versus the prior year period primarily due to increased profit from our comparable stores, partially offset by the impact of new stores. Canada segment profit was $45 million, up $0.4 million versus the prior year period due to improved comparable store performance, partially offset by deleveraging of cost of merchandise sold as a percentage of net sales, primarily associated with our efforts with Canadian production levels to maintain demand, as well as a weaker Canadian dollar. This marks our first year-over-year increase in both U.S. and Canadian segment operating profits since 2023. highlighting our imminent inflection in total company profitability as new stores continue to mature. Our balance sheet remains strong with $64 million in cash and cash equivalents and a net leverage ratio of 2.7 times at the end of the quarter. Our updated capital structure gives us increased liquidity through a $55 million expansion in our revolver capacity, extended debt maturity through 2032, and significant flexibility to pay down debt in the future. Our strong cashflow generation will enable us to further deleverage our business as we target a net leverage ratio of under two times within the next couple of years. We are also pleased to announce that our board of directors approved a new $50 million share repurchase authorization. We will continue to take a balanced approach to capital allocation as our strong financial model allows us to fund organic store growth, reduce debt, and opportunistically repurchase shares. Finally, I'd like to discuss our updated outlook for the remainder of fiscal 2025. Our U.S. business remains strong entering the fourth quarter, while in Canada, macro pressures continue to weigh on results. We've made strides in better calibrating sales and production and are planning for Canadian macro conditions to remain challenging for the near term, with roughly flat Canadian comps in the fourth quarter. Our updated full-year outlook for 2025 now includes the following. Net sales of $1.67 billion to $1.68 billion, reflecting a weakening of the Canadian dollar since last quarter. Comparable store sales growth of 4.0% to 4.5%. Net income of $17 million to $21 million, or 10 cents to 13 cents per diluted share. adjusted net income of $71 million to $75 million, or 44 to 46 cents per diluted share, adjusted EBITDA of 252 million to $257 million, capital expenditures of 105 million to $120 million, and 25 new store openings. Our outlook for net income assumes net interest expense of approximately $62 million and an effective tax rate of approximately 41%. For adjusted net income, we are assuming an effective tax rate of approximately 26%. This concludes our prepared remarks. We would now like to open the call for questions. Operator?