Savers Value Village, Inc.

Good afternoon and welcome to Savers Value Village's conference call to discuss financial results from the second quarter ending July 4th, 2026. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and introductions 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 the 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 Thank you for listening. 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 the historical non-GAAP measures to the most directly comparable GAAP financial measure can be found in today's earnings release and SEC filings. Joining from management on today's call are Mark Walsh, Chief Executive Officer, Jubran Tanious, President and Chief Operating Officer, Michael Maher, 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. Our second quarter results reinforce our confidence in the power of the model as we continue our earnings inflection with the third consecutive quarter of year-over-year adjusted EBITDA growth. U.S. comp growth remained broad-based, profits increased in both major markets, and new-store profitability has started to ramp ahead of our original expectations. Together with Thrift IQ and our broader productivity agenda, this gives us a sustained path back toward high-teens adjusted EBITDA margins. Let me start with a few highlights from the quarter. Sales in our U.S. business grew 11.6%, with comps up 6.6%, driven by both average basket and transactions. Secular adoption of Thrift remains strong, and our comp continues to be broad-based across categories, regions, and demographics. In Canada, comps increased 0.8% during the quarter, reflecting a roughly 70 basis point benefit from the Easter shift. Despite the limited top-line growth, grew Canadian segment profit almost 16% and expanded segment profit margin by 330 basis points, once again showing the impact of our productivity and profit improvement initiatives. Financially, adjusted EBITDA increased 8% to 75 million, or 16.6% of sales. And finally, we are updating our outlook for 2026, which Michael will address as part of his remarks. Turning to new stores, we opened four locations in the US and two in Canada during the quarter, including our recent North Carolina opening that delivered the highest opening week sales in company history. This performance in a new market underpins our confidence that our model is durable and scalable across regions. We are also seeing new store profitability ramp ahead of our original expectations, supported in part by ThriftIQ, A proprietary data driven platform that supports grading and pricing consistency, enhancing our customer value proposition. We are eager to continue growing our store fleet in the U.S. and believe we can expand at the current pace for years to come. For 2026, our plan remains to open around 25 new stores, more than 20 of which will be in the U.S. in 11 states with a nice mix of infill and new markets, including our first location in Tennessee opening later this year. Repeating a theme, our new store growth remains the highest return and the most important use of our capital. We are excited to bring our value offering to more consumers. Today, we also announced Thrift IQ, our next major innovation initiative designed to bring greater precision and consistency to pricing across our men's and women's apparel assortment. Because we process millions of unique items each week, we have built a proprietary data set across brands, categories, price points, and sell-through outcomes that would be difficult for another retailer to replicate. Thrift IQ uses that data to provide more consistent pricing recommendations while preserving compelling customer value. We built Thrift IQ with three core objectives in mind. Number one, improve our consumer value proposition with more precise, and Consistent Pricing. Second, deploy our proprietary data set across the store network. And finally, improve financial outcomes through stronger sales yields, larger baskets, simpler store processes and faster new store profitability ramps. We have conducted an intensive two-year test and learn process with Thrift IQ and have used it to price over 25 million items spanning 45,000 brands. The platform is already operational in 58 existing stores, including most new store openings over the last six months. Thrift IQ delivered improvements in sales yield and gross profit in our pilot stores, with average prices that are the same or lower than the rest of the fleet and continuing to average 40% to 70% off traditional retail. We believe Thrift IQ and our broader innovation efforts will be meaningful contributors as we progress for our long-term high-teens adjusted EBITDA margin target. Michael will discuss the pilot results and the financial implications in more detail. I've been busy touring our stores and CPCs, and the enthusiasm from our team members is palpable. The data-driven process simplifies workflows, enables greater cross-training, and helps us deliver compelling value more consistently across the assortment. In fact, store managers have reiterated that Thrift IQ is delivering value that is resonating with our consumers. Given the transformational nature of the platform, we will move deliberately and with rigor to ensure successful change management. We are also excited to announce our Savers Innovation Day in early November, where you can get a hands-on look at Thrift IQ and our other initiatives. We are reinventing Thrift again. I would like to now thank our nearly 24,000 team members for their role in driving strong results in the first half of 2026. and keeping our momentum going into the back half of the year. Our mission to make secondhand second nature continues to gain traction. And the progress we're making each day to expand our reach and bring an exciting thrift shopping experience to more customers is invigorating. We are well positioned to capitalize on the opportunity ahead and drive long-term value for our customers, nonprofit partners and shareholders. I'll now hand the call over to Michael to discuss our second quarter financial performance and the updated outlook for the remainder of 2026.

Thank you, Mark, and good afternoon, everyone. Before reviewing the quarter, I want to provide additional detail on the Thrift IQ pilot results and financial implications. As Mark noted, this platform allows us to be more precise and consistent in delivering great value to our customers. Thrift IQ is currently live in 58 stores across the U.S. and Canada. In these stores, we've seen customers respond positively through increased unit sell-through, larger baskets, and stronger sales yields with the same or lower average prices compared to the rest of our fleet. That translated into gross profit dollar growth that was approximately 100 basis points higher in our pilot stores than in our non-pilot stores. Thrift IQ is also helping our new stores ramp to profitability faster with better data-driven pricing out of the gate and simpler operational processes. For example, we're able to reduce training time for new graders by approximately half. Thanks in part to Thrift IQ, more than half of our 2025 class of new stores generated positive four-wall contribution in the second quarter, which is ahead of previous new store classes. We expect to provide additional detail on the new store maturation model at a future date. The early Thrift IQ results Continued maturation of the new store fleet and other profit improvement initiatives increase our confidence in the path to our long-term profitability goals. We expect these initiatives collectively to support 50 to 100 basis points of annual adjusted EBITDA margin expansion beginning in 2027 and a return to high teens margins within the next three years. We expect the financial contribution of Thrift IQ to build as deployment scales. We look forward to sharing more details at our Savers Innovation Day in November. Turning our attention back to second quarter results, total net sales increased 7.4% to $448 million. On a constant currency basis, net sales increased 7.1% and comparable store sales increased 4.4%. The favorable impact of foreign exchange rates was 170 basis points lower than in Q1. We are especially pleased with our sales results in the U.S., where net sales increased 11.6% to $255 million. Comparable store sales increased 6.6%, fueled by both average basket and transactions, with broad-based growth across regions, categories, and income cohorts. Younger and more affluent consumer cohorts are still our fastest growing demos, which speaks to the power of our model and its ability to resonate with all shoppers. As a reminder, the majority of our comp base is made up of largely mature stores with little benefit from our recent new store openings. As new stores enter the comp base, they will provide an additional tailwind to our comp growth. Given the breadth of our comp strength and compelling new store performance, we remain very confident in our ability to grow and scale the U.S. business. We also saw continued stability in Canada, where net sales and constant currency net sales both increased 2.2% to $158 million, and comparable source sales increased 0.8%, reflecting a 70 basis point benefit from the Easter holiday shift. Despite limited top line growth, we were still able to grow profits and expand segment margin by 330 basis points, which we attribute to tight production management Offsite Processing Improvements, and a continued maturation of our new stores. We believe this profit performance is durable, and with the addition of Thrift IQ, we are confident in our ability to drive future incremental profit growth. As it relates to the macro environment, conditions remain stable but sluggish, we do not expect a material change in Canadian economic conditions in the near term, and continue to plan our business around a roughly flat comp. Cost of merchandise sold as a percentage of net sales decreased 170 basis points to 43.1% due to comp leverage and efficiency initiatives, as well as growth in onsite donations, partially offset by the impact of new store openings. 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 100 basis points to 19.7%. The increase was driven primarily by new store growth, an increase in annual incentive plan expense, and higher non-IPO-related stock-based compensation expense. Selling, general, and administrative expenses increased 15% to $102 million, and as a percentage of net sales increased 150 basis points to 22.7%. SG&A included a $2 million impairment charge primarily related to the consolidation of one of our Canadian warehouse processing facilities, which was enabled by our continued efficiency improvements in offsite processing. SG&A also included $1 million of transaction costs related to the recent repricing of our term loan. Excluding these charges, SG&A increased 11%, primarily due to growth in our store base. Depreciation and amortization increased 22% to $25 million, reflecting continued investments in new stores, off-site processing, and information technology, as well as capital maintenance expenditures. Net interest expense decreased 19% to $13 million, primarily due to the impact of our debt refinancing last fall. Between that refinancing and our more recent repricing, we have reduced interest expense by approximately $20 million on an annualized basis over the last year. Gap net income for the quarter was $22 million or 14 cents per diluted share. Adjusted net income was also $22 million or 14 cents per diluted share. Second quarter adjusted EBITDA was $75 million and adjusted EBITDA margin was 16.6%. U.S. segment profit was $59 million, an increase of $10 million primarily due to increased profit from our comparable stores and the continued maturation of new stores. Canada segment profit was $46 million, up $6 million due to increased operating efficiency driven by our profit improvement initiatives. Our new stores continue to perform in line with our expectations on the top line, and as previously mentioned, we are seeing their profitability ramp ahead of our original expectations. Our balance sheet remains strong with $92 million in cash and cash equivalents and a net leverage ratio of 2.4 times at the end of the quarter. We also repurchased 1.2 million shares at a weighted average price of $8.10. Our capital allocation strategy remains unchanged as we prioritize organically funding new store growth, repaying debt as we target a net leverage ratio under two times by the end of next year, and opportunistically repurchasing shares. I'd like to now turn to our guidance and discuss our updated outlook for the remainder of fiscal 2026. Our updated outlook reflects our first half performance and continued adjusted EBITDA growth in the second half. The costs and benefits of a phased ThriftIQ rollout are also incorporated with a financial contribution from ThriftIQ expected to build as deployment scales. We now expect Net sales of $1.77 billion to $1.79 billion Comparable store sales growth of 3 to 4% Net income of $67 to $76 million or 42 to 47 cents per diluted share Adjusted net income of $76 to $85 million or 47 to 53 cents per diluted share adjusted EBITDA of $265 million to $275 million, capital expenditures of $125 million to $145 million with approximately 25 new store openings, net interest expense of approximately $48 million, and an effective tax rate of approximately 28%. For adjusted net income, we are assuming an effective tax rate of approximately 27%. We are projecting weighted average diluted shares outstanding to be approximately 160 million for the full year. This does not contemplate any potential future share repurchases. Finally, I'd like to briefly touch on our expectations for the third quarter. We expect total revenue growth between Q1 and Q2 levels, with comp sales growth moderating slightly as we begin to lap stronger comparisons. We expect adjusted EBITDA to be modestly below Q2, driven principally by a shift in timing of new store openings and associated pre-opening expenses between Q2 and Q3. We plan to open eight new stores during the quarter, reaching the midpoint of our full-year target in August. This concludes our prepared remarks. We would now like to open the call for questions. Operator?

We will now begin our question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the roster. Your first question comes from the line of Brooke Roach with Golden Saks. Your line is open. Please go ahead.

Good afternoon and thank you for taking our question. I was hoping that we could unpack the drivers of the return to the high teens EBITDA margin that you outlined on the call. Can you talk a little bit more about the assumptions that underpin that? How to think about the contribution from ThriftIQ over that three-year period and the ThriftIQ contribution each year within the 50 to 100 basis point plan and any other particulars that we should be thinking about with regards to phasing as you look to return to that EBITDA margin rate. Thank you.

Yeah, thanks Brooke. It's Michael. certainly the you got the components there it's a combination of our innovation agenda which Drift IQ is a significant piece obviously as well as our new store ramp and just our ongoing comp margin leverage and other profit improvement initiatives I expect it's going to be a healthy contribution and balance of contribution from all three of those things it's and and there's there's frankly a little bit of overlap too so for an example for example The innovation contribution to new stores is part of that. So as we think about the 50 to 100 basis points per year, as I mentioned in my remarks, the contribution from Thrift IQ is going to build as the deployment scales. And so as you think about us rolling that out back half of this year, all the way through 27 and into early 2028, I would expect to see full annualization come in 28 and beyond. And so I would think about probably putting, expecting us to be at the lower end of that 50 to 100 basis point range in 27 and then building toward the higher end of that range in the subsequent years.

Great. And then Mark, maybe we can talk a little bit more about the benefits to Thrift IQ and what it means for your customer base. You spoke a little bit about some of these engagement metrics that you were seeing within the test stores What does that mean for traffic, customer repeat rate, basket size conversion and net? As you think about that 100 basis point higher gross profit dollar growth, how much of that is coming from better sales momentum and how much of that is coming from better COGS efficiencies?

Thanks, Brooke. Look, I think let's start with a little context on why we got to Thrift IQ and how do we get there. It's really born from an opportunity. We've accumulated one of the largest data sets in secondhand retail, processing more than a billion pounds of goods annually. And Thrift IQ, over the last almost two years, has helped us price more than 25 million items and, most importantly, evaluate the sell-through of those 25 million items. That will likely double to 50 million by year-end over 45,000 brands. The objective very clearly for us as we started this process was to improve the customer value proposition, full stop, by making prices more precise, consistent, and predictable, removing a lot of the subjective nature of our grading process to an objective approach. And as we talked about on the prepared remarks, in our pilot stores, the average prices have been the same or lower than the rest of the fleet and that's still continuing to average that very important band that we try to operate in between 40 and 70% below traditional retail. The result that we've seen in our pilot stores is it's producing better outcomes across a number of metrics. Higher unit sell-through, larger baskets, stronger sales yields and we've talked about the faster new store ramps, very important as well. Ultimately, it's driving improved profitability.

Great, thanks so much. I'll pass it on.

Your next question comes from the line of Matthew Posse with JP Morgan. Your line is open. Please go ahead.

Great, thanks, and nice quarter. Thanks, Matt. So, Mark, with seven consecutive quarters now of mid-single-digit same-store sales in the U.S., can you speak to new customer acquisition, trends from your existing cohorts, and any market share metrics that speak to the acceleration or the inflection and just any constraints to sustaining mid single digit comps in the back half of the year, in your view.

Thanks, Matt. Let me start with the new customer trends. We continue to see robust new customer interaction, and we are very focused, obviously, on driving those individuals into our loyalty program. big stickiness factor for us, and obviously we can track those customers on a consistent basis. I would say the most interesting and most exciting thing we're seeing, look, we're still seeing that younger cohort grow disproportionately to the rest of the age cohorts in our traffic and our customer base. But what's really exciting for us, and I think it speaks to the universal appeal of how we're delivering value and merchandise, is the fact that both the high and the low end, we're seeing growth. Our high household income customers and our low household income customers are outpacing growth of the other household incomes in the middle. So sort of a sandwich effect. But you think about that dynamic, it's really wonderful from a universal appeal perspective. So we're bringing in high household income, low household income, getting in the shop, creating stickiness, having them sign up to the loyalty database, or continually see that frequency improve. So net, net, net, I think that's a lot to do with why we've seen that consistent pattern over the last couple of quarters, as you mentioned.

Hey, Matt, it's Michael. A couple things I'd add on just the sustainability of the comp into the back half. So first of all, Mark kind of alluded to this, but we've seen really healthy balance of that growth. It's Transactions, it's basket, it's broad-based across categories, regions, demographics. And just the other thing I would add is that we still, our comp base is still a relatively mature comp base. Only now are new stores really beginning to enter that comp base in a significant way, and that's going to continue to provide a tailwind to that US comp for a while.

Great. Michael, just to break down the return to high-teens EBITDA margin as a multi-year target, what would be the best way to think about the gross margin rate opportunity if we're thinking about breaking down that high-teens EBITDA margin just between gross margin and SG&A, maybe relative to the past in terms of when we had previously seen high-teens EBITDA margins in the business?

Yeah, well, Matt, it's probably a little early for us to get into too much specifics on that yet, but I do think gross margin is going to be a meaningful contributor. All of the things that we've seen this year in margin, whether it be leverage on that comp base or continued efficiency gains in our Canadian business, but also, very importantly, the continued maturation of new stores and the contribution of Thrift IQ, all of those things are going to have a positive impact on gross margin over time. But I would expect and some leverage on our SG&A as well as we continue to scale on the top line. So we'll have more details on that as we progress.

It's great, Cutler. Best of luck. Thanks. Thanks, Matt.

Your next question comes from Michael Lasser with UBS. Your line is open. Please go ahead.

Thank you so much for taking my question. Can you unpack the guidance change from what you were expecting previously. You raised the low end of your expectations. If we look at where you came out within the second quarter, it fell short of where the consensus was despite the increase to the full year outlook, at least at the midpoint. So perhaps you can bridge that for us.

Michael, are you talking about EBITDA?

Yeah.

I think the consensus expectation numbers we're seeing, we're ahead of that on the second quarter. So just as far as our outlook for the year, yeah, we're happy with our results so far. We're a little bit ahead of our plans. We've got half the year to go, more than half of our earnings to go so far. We're off to a good start to the second half, but obviously a long ways to go yet. We do have some slight shift. I mentioned in my remarks timing of new store openings and the associated pre-opening expenses between Q2 and Q3. But other than that, we're essentially holding our view on the back half of the year unchanged, and therefore we thought it appropriate to pull up the lower end of the guide.

Okay. I'll just take that offline. My follow-up question is you alluded to slower comps in the back half in part because of Yeah, sure, Michael. So what we're seeing is gross profit dollar growth around 100 basis points.

relative to the rest of the fleet in the pilot stores with Thrift IQ. Just at the risk of stating the obvious, that could come from higher sales for a given level of production or similar sales but on lower levels of production, right? Essentially, it's about sales yield, and that's where we're seeing that improvement. We're seeing a mix of both, frankly, in our pilot stores. And so we focused on that gross profit improvement. Certainly that can be a component, though, of comp tailwind for us. So we have factored that in. Remember, it is going to be a phased rollout. We're going to be deliberate about that. So while to a certain extent that is helping us out, we are also just mindful of the continuing momentum from last year that we are beginning to lap, particularly in the U.S. in the back half of the year.

Understood. Thank you so much and good luck. Thanks, Michael.

Your next question comes from Randy Connick with Jefferies Group. Your line is open. Please go ahead.

Yeah, thanks, guys. A couple of things. So first on Canada, continue to kind of drive up the profit margins there. I think getting that region very much more efficient and and a lot of other people. So, just kind of remind us where we are in the cycle of that region's margins and where you think they can go in the coming years. And then back on, I think something you said in the script, I believe you said something to the effect of North Carolina, that store, I think you said something to the effect of it was like your best opening ever. You know, kind of remind us what you're doing differently from a store opening Thank you, Michael.

a lot going on behind that that we expect to continue to drive improvement for us for several quarters yet. So first of all, just tight management of production in response to demand trends. That's helping us drive sales yields, which, you know, as we just talked about, is a meaningful indicator of gross margin. Offsite processing, we talked about a little bit in our prepared remarks, but we continue to make improvements not only on the cost per unit, but on the sales yields of the items that we are processing in our off-site facilities, that's helping drive improvement in the Canadian segment. And then on-site donation growth continues to be robust, you know, outpacing our sales growth. So all of those things are contributing to Canadian margin and we expect will continue to contribute to Canadian margin in the coming quarters. And then the other factor which we talked about for a while is just the impact of the new store drag. We've talked about this for a while. New stores are a temporary drag on profit margins. They begin to inflect over time. But we are now shifting the vast majority of our growth to the U.S. as we go forward, which means Canada will be relatively few new store openings going forward, and that means less of that new store drag. And so we do expect to continue to see Canadian contribution margins that are above those in the U.S. as we focus our growth investments in the U.S. and I would expect to continue to hold, if not improve, Canadian margins for the foreseeable future.

Then Randy, this is Jubran. On the new stores, yeah, very excited about that first location in North Carolina. That's our Burlington store, which was a record breaker. And very pleased with our new store fleet in general. The performance has been right on track with what we had hoped. And I think we've gotten better at this. There's a few reasons why. The first is that we've been on a continuous improvement path with our algorithm and, frankly, picking winners when it comes to sites. So the site selection process has continued over the years, and I think our success bears this out. And when you think about entering a new market, a new region of the country where we've talked about the southeast, the southern tier, really just reinforces the durability and scalability of our model. It resonates on all markets. So that's the first, site selection. The second thing is we actually have a dedicated finance and senior leadership team that holds the hand of a new store as it grows into its maturity curve. And that is helping us ramp as well. I think we made in the opening comments a comment that most new stores are opening with Thrift IQ. that has cut our training time in half. It has streamlined the process and it makes it easier for a new store to get on its feet quicker. And then the last thing I would say, Randy, is the marketing playbook. And this is a nod to the continued evolution and good work by our marketing team where there is a focus on the local communities with a mix of tactics, paid search, outdoor, right, billboards, We have cultivated a nice ecosystem of influencers, including new influencers that join in these new markets, and then optimizing the physical site itself, right, for maximum drive-by awareness. So you put all that together, and you see the performance that we're seeing in the new stores. And I'll just close by saying really excited about the additional stores to come in North Carolina, that first store in Tennessee, which will open later this year. and then a real nice pipeline that's filling out for us in the southern tier with stores to open in 2027 and beyond.

Super helpful. And then I guess last one for Michael. Remind us where we are with onsite donation penetration, where we come from, let's say three years ago, where we are today, where do you think we can go? How is GreenDrop helping with that? And then the strategy going forward there. and then just remind us finally on differential on let's say the profit of the margins or the cost benefit of onsite versus third party. Because if you kind of think about that going forward combined with Thrift IQ and other strategies and better new store openings, it feels like you have real good confidence in growing that margin structure back to those high teams, you know, either on target or even quicker than your plan. So just curious there. Thanks.

Yeah, Randy. So first of all, just the metrics. So we reached 84.9% in the recent quarter in terms of onsite donations and green drop as a percentage of our total pounds process. That's up from 78.5% a year ago. So significant growth. and we continue to see that in both countries. And I'll let Jubran speak to why that is and how high is high. But I would just say, yes, that is absolutely a factor in our gross margin expansion and in our confidence in the continued gross margin expansion. It is both a top line driver because that tends to be a high quality source of supply and a margin driver because it's our most cost efficient source of supply as well. So yeah, definitely. factored into our outlook for the year and our contemplation of the long-term algorithm.

Yeah, Randy, Jubran, I would also just add that we are seeing broad-based on-site donation growth across regions, across countries, and that really is a function of the execution at our stores. Super proud of our field leaders for how we're showing up to donors each and every day. And that's really what's driving that broad-based growth. In terms of how high is high, and can you continue to keep growing onsite donations? Absolutely. Even though we have continued to drive them over the years, we expect that to continue because as large as we are, we're still getting just a small portion of the textiles that go into landfill each and every year. So in terms of continuing to hold on to that donor and win that new donor because of advocacy and execution, We fully expect to continue to grow on-site donations in both mature stores and the new stores that we're opening for years to come.

Super helpful. Thanks, guys.

Thanks, Randy. Thanks, Randy.

Your next question comes from Bob Derble with BTIG. Your line is open. Please go ahead.

Hey, guys. This is actually Jake on for Bob. Thanks for taking my question. Just wondering if you could compare and contrast what you're seeing from the consumer in Canada versus the US. You know, are there differences in health of the consumer or, you know, customer behavior, traffic, spending patterns? Just curious there. Thanks.

Jake, thanks for the question. This is Mark. Well, I think that one thing very consistent in both countries, both in the US and Canada, the younger and the higher household income cohorts, are becoming a larger portion of our customer base, absolutely. I see growth in both of those cohorts. The difference between the two countries is really the low end, and we're still seeing pressure in Canada at the lower end of the household income demographic.

Great. Thank you.

Your next question comes from the line of Peter Keith with Piper Sandler. Your line is open. Please go ahead.

Thank you very much, and good afternoon, everyone. The Thrift IQ certainly sounds exciting, and I was hoping you could help me bring it to life a little bit more, because if I go back, I do think about Savers as a very analytical company that was able to look at demand trends and adjust pricing historically. So it sounds like this is providing a bit more consistency, but is it reacting to demand? Is it reacting to competitive pricing? Maybe just help me understand the step change benefits that seem to be occurring here.

Yeah. Hey, Peter. This is Jubran. I'll take a stab at that, and the guys can jump in if I miss anything. And it's a good question because it's important that everybody understand the exact change that we have made here. So if I could just take a minute, walk all of you through with a simple before and after. Prior to Thrift IQ, our team members would assess each garment and they would grade it based on condition and quality to determine its value. Then that grade would translate to a price based on the category and department. For many years, this method has worked well. On average, we would get it right, but it's too inconsistent. For example, under that legacy approach, two team members could evaluate the exact same garment and come up with different prices, even with the best training because of the subjectivity of the assessment itself. So inconsistent and in Thrift, as you mentioned, consistency matters. So now fast forward to Thrift IQ, we're no longer asking the team member to assess condition and quality. We're simply asking them to identify the brand. We then use that brand and combine it with seasonality, sell through to determine the price of the garment. So it's easier, it's more objective, allows us to show up to the customer and a more consistent and precise way. And that is the key.

All right. That's a great explanation. Thank you for bringing that to light for me. Maybe I'm just thinking on Drift IQ. Does that go just to the store level or can it also obviously go into CPC?

It would be both. So our plan, the rollout plan that the guys articulated earlier, will actually be front loaded with our offsite facilities. And then we'll cascade with a fast follow into our traditional stores. So really both, Peter.

Great. Okay. One last question, and maybe this is a financial question for Michael. But on the new store growth, where it has been a headwind to EBITDA, I believe it's neutral to EBITDA this year. As we move into the back half, are we still neutral or do we start to see some EBITDA benefits from that historic store growth?

Yeah, Peter, it's actually a slight tailwind this year. There's a little timing within the year in terms of the, you know, when the stores open, how the pre-opening expenses flow. But overall for the year, it's a very modest tailwind, which is an inflection point from where we've been for the last several years. But what is encouraging to us is that while new stores are still performing in line with our expectations on the top line, the profitability is ramping faster. And as I mentioned, we opened that 2025 class fairly back-weighted as you probably remember last year. So they entered this year still relatively young. More than half of that class was positive on a four-wall basis, four-wall business contribution in the second quarter. That's meaningfully ahead of what we've seen before. Given how important that has been to our financial performance over the last few years, to our algorithm going forward, we're really encouraged about what that means for future profit growth. And together with the innovation agenda, it's why we felt more confident in the path back to the high-teens EBITDA margins.

Very good. Sounds exciting, and thanks so much. Thanks, Peter. Thanks, Peter.

Your next question comes from Dylan Carden with William Blair. Your line is open. Please go ahead.

Hi, this is Anna Lynn Scott on for Dillon Carden. Thanks for the time. I'm just curious if ThriftIQ was envisioned in the original high-teens EBITDA margin target that you had out there for a while or if this is entirely incremental. And then should this be viewed as a platform to add additional efficiencies over time? Thanks.

Yeah, I'll take the first part of that question. So I would say not specifically, as we've talked about our algorithm over time, we've long believed it rested on a few pillars. Part of it was new store growth and the continued maturation of those new stores. And part of it was our innovation agenda. And we've, as Mark mentioned in his remarks, we've been working on this for a couple of years now. We have seen increasingly encouraging signs from it for some time. Obviously, didn't feel ready to talk about it until now. But we certainly saw innovation as and a number of other people. And I think that's an element of the path back. What I think has changed for us now is as we're seeing these results accumulate, as we're seeing the ramp of our new stores continue to get better, what is new is that we're able to provide some more specificity and pull forward the timeline on that to seeing that path back to high teens EBITDA margins within the next three years.

And Alin, let me just add on your comment about platform for innovation. a great opportunity to make sure I personally invite, we all personally invite you guys to our Innovation Day that will be taking place in Minnesota in early November. It's really an opportunity to get a firsthand look at the next phase of innovation, really our innovation revolution, and walk you through core improvements we've made to the CPC operating environment, giving you a chance to live comparison of how we're changing our pricing approach from the old way that Jubran described to Thrift IQ. And then lastly, the chance to see some of the additional innovation ideas that we will be driving through the system in the very, very late part of this year into 27.

Great. Thank you so much for the time.

Thank you.

Your next question comes from the line of Mark Altschweger with Baird. Your line is open. Please go ahead.

Thank you for taking my question. A couple here. You said Thrift IQ is helping new stores ramp profitably faster, cutting the greater time. I think almost half you said. Does that change the underlying new store model and the payback period? At what point would that argue for maybe stepping up the opening cadence from the 25 per year that you are on right now?

Hey, Mark, I'll speak to the new store model and maybe Jubran can speak to our pace of new store opening. So, you know, it's early, but yes, so far what we're seeing is a faster path to profitability than we previously anticipated. Drift IQ being one among several factors contributing to that. We do plan to refresh our new store economic model and share more about that with you all in future orders. I think it's a little early for us to do that yet.

And then, Mark, on the new store opening, 25 stores per year as we've guided, we like where we're at. We continue to see great site selection, good performance, high batting average on those. I think we've talked about in previous calls the tone and tenor of the conversations that we've had with developers and landlords has really changed over time. So really like how our pipeline is building. I will take us back to one of the fundamental building blocks of opening up a new store, certainly a new market, and that's supply. We want to make sure that we've got the supply equation fully satisfied, the cornerstone of which is the on-site donation. So we want to make sure we've satisfied that. But in terms of finding new sites that are going to be very attractive to our long-term algorithm, really no concerns at all about that and excited about what the remainder of this year will bring, 2027. And then we're starting to fill up the pipeline for 2028.

Thank you. And you called out some of the success in newer markets like North Carolina, Tennessee. How would you characterize the profitability of entering a new market versus adding another store in an existing market and whether you kind of lean towards one versus the other in your plans?

Yeah, Mark, it's Michael. I mean, there certainly are different dynamics there and they can work in different directions, too. So, for example, when we enter a new market, We typically assume that we're going to start out a little bit lower in terms of onsite donation penetration than when we open a store as an infill on an existing market. That's all baked into the initial planning, you know, and we still have to hit the same return thresholds. But, you know, there may be offsetting things around, you know, real estate costs, for example, that can go into that. So, you know, overall, I wouldn't say that one is necessarily always going to be higher or lower than the other. At the end of the day, We target a return on our investment that is somewhere around double our cost of capital, and we've got no shortage of candidates of stores, new store locations that meet that hurdle.

Thank you.

Thank you. Thanks, Mark.

Your next question comes from the line of Jeremy Hamblin with Craig Hallam. Your line is open. Please go ahead.

Hey, this is Will on for Jeremy. I just wanted to start by seeing if you could share any more color on the composition of the U.S. and Canada comps in the quarter in terms of basket versus transaction and then maybe how those trends have continued here in quarter to date.

Sure. Yes, Michael. So essentially kind of similar to what we've seen in recent quarters in the U.S., pretty good balance. We're seeing both basket and transaction count growth. In Canada, it's more basket-driven. Transactions flatted down slightly. And thus far, what we're seeing in the third quarter is good. The comps in both countries are roughly in line with what they delivered in the second quarter.

Got it. That's helpful. And then it sounds like the new stores are maturing ahead of expectations. I guess one, are all of the 24 class of stores in the comp base at this point? And then two, what sort of comp lift have you seen from the new stores in the US?

Yeah, so everything we opened in 24 is now in the comp base. And so, you know, just a few of the 25 class because that was relatively back weighted. So as I mentioned earlier, still pretty mature comp store base, but as those 23 and 24 class new stores have now entered the base. We're seeing anywhere from 40 to 50 basis points of comp benefit from that because as I think the implication of your question, as I'm sure you know, is that even once a store enters the comp base, it's a young comp store. It's still growing at a rate well ahead of our mature fleet. And so that's a nice tailwind to the comp base. And we still have a number of years before that effect has sort of normalized and plateaued.

Got it. That's helpful. Thank you for taking the questions. Sure. Thank you.

Your next question comes from the line of Owen Rickert with Northland Capital Markets. Your line is open. Please go ahead.

Hey, guys. Thanks for taking my question here. For the non-loyalty customer cohort, can you just describe how they are behaviorally, are they primarily one-time or infrequent visitors? And then maybe secondly, are there any specific conversion strategies you're deploying as of recent, maybe Thrift IQ-enabled personalization to maybe bring them into that loyalty ecosystem?

It's a great question. Thanks, Owen. I'll go here. In terms of one of our key Retail operating goals and objectives that we talked to store managers about is signing up people for the loyalty program. Really concerted effort on making sure every opportunity is converted into a new member signup. So in terms of the non-member frequency transaction levels, obviously we don't have a lot of that because we don't have the data. But what I can tell you is were dogmatic about making sure that our loyalty signup rates continue to grow and that, and especially in new stores, we have very, very high goals for our store managers in terms of getting them into the fold. So clearly it is a core piece of our retail agenda and continuing to grow that loyalty base, which has grown very nicely over the last three or four years.

Great. Thanks, guys. Thank you.

We have reached the end of the Q&A session. I will now turn the call back over to Mark Walsh for closing remarks.

I want to thank everyone, as always, for your interest. We look forward to updating you on the third quarter, and I hope to see each and every one of you in Minneapolis in early November for Innovation Day. Thanks again.

This concludes today's call. Thank you for attending. You may now disconnect.