Q3 2020 Michaels Companies Inc Earnings Call
Good morning, My name is Andrew and I will be your conference operator today.
At this time, we'd like to welcome everyone to the Michaels companies The school Twentytwenty third quarter financial results Conference call.
All lines have been placed on mute to prevent any background noise. If you need assistance during the conference call. Please press Star then zero and an operator will assist you. Please note. This event is being recorded.
Thank you and now I'd like to turn the call the over to your host Jim Mathias Director of Investor Relations Mr. Matthias you may begin the conference.
I'd like to welcome you to our fiscal 2023rd quarter financial results conference call for.
Is anything on this morning's call our CEO actually Buchanan at our CFO, Mike Diamond.
For today's call the supplemental slide deck available on our Investor Relations Web site contains additional financial content to support today's discussion.
Before we begin our discussion.
Let me remind you that the comments made on this call as well the supplemental information provided on our web site may constitute forward looking statements and are made pursuant to end within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of 1995 as amended.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those the anticipated by these statements information.
The information about these risks is noted in our earnings press release.
And the risk factors in our latest annual report on form 10-K filed with the FCC as well as in our other SEC filings.
These forward looking statements are only as of today December 32020, and the company assumes no obligation to update the statements except as required by law.
Investors are cautioned not to place undue reliance on these forward looking statements.
Also please note that we will reference non-GAAP financial measures on today's call that are presented on an as adjusted basis unless otherwise noted.
These include EBITDA operating income net income and diluted earnings per share average.
A reconciliation of these measures to the corresponding GAAP measures are detailed in today's earnings release as well at the supplemental slides.
I'd now like to turn the call over to our CEO Ashley.
Thanks, Jim.
Good morning, everyone.
I hope, you're all staying safe at healthy either on what continues to be unprecedented here.
Before I get into our quarterly results I want to start by acknowledging the hard work of the entire Michaels team.
For all this year our team members have navigated the host of unprecedented challenges with the resilience and tenacity.
To recognize their hard work I'm excited to announce day that we are working on our team numbers a onetime holiday bonus.
Well the much stronger position operationally financially and strategically they were at the start of this year due to ARCI numbers hard work and dedication in serving our maker customers.
Moving to our strong third quarter results, we delivered significant sales gross margin expansion and strong free cash flow generation.
Our relentless focus on serving our customers.
The draw the 16.3% comparable store sales growth in the quarter.
The 162% increase in operating income and over 100% increased at diluted earnings per share.
Free cash flow are willing to particular strength for Michaels as we generated approximately 380 million during the third quarter.
On on a year to date basis Michaels has generated 633 million in free cash flow.
We are the leading arts and crafts retailer by effectively executing on make your strategy. We are repositioning Michaels for long term sustainable gross.
Our performance this quarter demonstrates our focus on providing our makers with the arts and crafts products they want.
The ballot tailored at relevant seasonal products is working very well.
We saw broad based demand this quarter across all product categories and in addition to the robust arts and crafts performance.
The experience better sell through of our fall of housing inventory.
We're also affecting the communicating with our customers providing inspiration and ideas for the holiday celebration.
What's given the current reality will likely include smaller gatherings of more time spent at home at here.
Our strong rates of sell through combined with lower promotional activity in the quarter results at both higher margin rate and significant margin dollar gross.
We ended the third quarter for the.
Approximately 850 million in cash on our balance sheet.
The results of our cash generative business model and our ability to actually the gets strong customer demand.
Going forward as we make decisions on how to best is the play our capital we will continue to focus on the priorities outlined at our Investor day.
Our top priority is investing in our strategic growth initiatives in order to drive sustainable long term growth.
This is followed by using our cash to pay down debt and reduce our leverage.
Third we will then look to opportunistically repurchase shares and finally, considering potential acquisitions that align with our growth strategy.
During the third quarter, we took an important the first step and improving our capital structure and pay down the 150 million of debt as part of our refinancing.
We plan to continue to make progress at strengthening and de leveraging our balance sheet as we execute against our strategy going forward.
Now I'd like to share some of the progress our team has made I guess the three strategic pillars, we outlined during our recent investor day, the pillars are strengthening our retail foundation.
Modernizing the omni channel experience.
And reestablishing Michaels as the expert brand for makers.
First of.
With regard to shrink the our retail foundation, we believe the critical component of being a successful and growing especially retailer is ensuring that the assortment fell within our stores at the right amount of newness and relevance for our customers.
Within each category, we're listening to our customers and using their feedback Jeffrey product selection and the line items for their interest.
During the third quarter, we expanded space devoted to the technology.
More than tripled our private label color sort of on yarn and improve both assortment and presentation of jory.
In addition, we on materially improve the efficiency of product flow between the backroom ourselves by.
Minimize the number of touches on getting product out to our customers.
We're also enhancing the level of in store create of expertise available to our makers by training our team members and when possible hiring team members, who are also makers themselves.
At least simple possible processes.
We're also freeing up our team to the but more of their time at focus to the customer service.
Michael It's the adopted a much more disciplined and balance approach pricing is a critical part of the strengthening our retail foundation.
We are working the simple by pricing for our customers and also better communicate value by offering a more consist of promotional cadence.
On reducing underperforming promotions.
With more newness on our selection the improved flow and availability of product in our stores.
They are the on pricing and ongoing work to improve customer service. Our team is working hard to provide our customers where the better experience in our stores.
We have seen these efforts drove the nearly 300 basis point increase in our in store satisfaction scores.
Over the next six months, we expect ongoing changes, including for example, I think shelf space the categories are popular with customers.
Expanding assortment of the category and improving the layout of other categories to drive sustainable growth for our business.
Moving on to our second pillar.
Modernizing our omni channel experience.
We continue to trend for Michaels into a leading omni channel specialty retailer.
The ecommerce revenue grew 128% in third quarter 215 million and represented nearly 10% of third quarter revenue.
The significant portion of our E commerce sales are fulfilled through both the.
Curbside pickup and think they delivery, where we enjoy strong profitability the.
The worst of that of the store transaction.
Progress continues and we're constantly iterating and introducing new omni channel features and enhancements that are garnering positive customer response on strong adoption.
For example customers can now receive text alerts when her BOPUS orders are ready for pickup and when opting for curbside pickup can easily notify the stores of the Rob will be a text of the parking lot.
We've also added a book this option to our on line up and with the improve signage on made it easier for customer to pick up their orders at our stores.
These measures of improved store efficiency and provide a better shopping experience for the customer, especially at safety remains top of mind.
At the introduction curbside has the highest net promoter score of all our online channels.
Additionally, on new online at express checkout option allows customers to purchase for basket and just work looks for.
Further simplifying the online shopping experience and.
In the study we have found is many of the 90% of customers and the express checkout actually checkout.
That's a great close rate and show the value of providing easy user friendly process for customers to navigate.
And finally.
We watch Michaels probe in the third quarter and we are encouraged on the early customer response at interest.
Our study show that our core maker customers or two X more likely the by Arts and crafts the poetry of book.
These micropro orders have an average basket size of the were to ex the average Michaels customer losses.
Continue to enhance the the offering and expand our assortment, adding of 2000 skews in the quarter.
We offer more of the pop out of the skews on Michaels Pro platform and we're adding more every month.
The full rolled out for the months ahead as we continue for about a seamless unsafe omni channel shopping experience for our customers.
And finally, our third pillar is to reestablish our ramp position at the expert for makers.
We believe we're making great progress toward reestablishing Michaels at the end.
Expert brand for core maker customer.
Our branded marketing are key enablers of our success across colors one into the.
Our focus on inspiring and engaging our customers.
This comps for clearly in our marketing our me by you campaign continues to resonate with new and existing maker and establish Michaels as the expert brand.
Restricting our customer relationships the content community and commerce.
We're focused on driving further customer engagement by leveraging CRM loyalty and community.
And we've seen strong outcomes in the short period of time, including increasing personalization to more than 80% of emails.
Growing enrollment in our text messaging on loyalty program engage.
Engaging on record on lot of with compelling virtual contact.
And using insights for our maker community and messaging on a go to market approach.
Our efforts are paying off as the worked at deeper relationships with existing customers and continue to attract new ones. The Michaels.
Within our Acumedia of makers, we are gaining insights on how to improve our go to market strategy and improve on messaging.
And the results are compelling.
As we discussed at our Investor Day, We then arts and Crafts. We are ranked number one in net promoter score number one on top of mind awareness at more than 33% of makers use Michaels as their primary retailer for arts and crafts.
We continue to see new customers coming to Michaels and.
In addition, the shopping our stores using BOPUS curbside ship from store and thing day delivery to drive sales.
In the months ahead, we will build on this progress by expanding the use of personalization across the web and content, including suggesting items based on browsing or pass purchase history.
We will continue to expand the virtual content and develop our communities Lane.
Laying the foundation for future strategic initiatives that will connect content commerce and community.
We had a strong quarter end.
I'm proud of how the team has continued to execute on our strategic pillars of transformed Michaels.
The team members have successfully navigating the challenge here and I'm excited we were able to one of them, especially the bonus totaling $10 million during this holiday season.
There's much more opportunity ahead, as we continue to expand our assortment.
Services the capability to make Michaels the one stop shop for Arts and crafts.
Now I'd like to turn it over to Mike to kind of the financials in greater detail.
Thanks, Ashley and good morning, everyone. Michaels continues to make progress on our key strategic initiatives, which enabled us to deliver strong sales growth in the third quarter.
Third quarter sales totaled $1.4 billion, an increase of 15.1% on the year over year basis.
Comp store sales grew 16.3% year over year.
As Ashley mentioned, our strong third quarter performance was driven by strength across our core arts and crafts business as well as accelerated sell through of our seasonal fall and Halloween inventory during this quarter.
Our exiting sales trends for the third quarter were in the mid single digits, which we expect to continue in the fourth quarter.
Moving down the income statement.
The third quarter gross profit increased 32 per cent from a year ago to $582 million. The drivers of this increase were occupancy cost leverage due to strong demand throughout the quarter on lower promotional cadence for the quarter, reflecting our disciplined pricing approach and the continued benefits from on the.
Going pricing and sourcing initiatives.
The these drivers position Michaels well for gross margin dollar improvement and sustainable long term growth, even as we continue to make growth investments and see a higher mix of ecommerce sales finally.
Finally, we saw a small impact on third quarter gross profit from tariffs and of largely lapped the tariff impact at this point.
SGN eight for the quarter was 26.5% of sales an increase of 10 basis points from the third quarter of last year. That's.
That's DNA increased in absolute dollars on a year over year basis, primarily due to an increase in performance based compensation as well as an increase in professional fees associated with ongoing initiatives intended to drive growth and profitability.
These increases were partially offset by the cost containment actions, we have taken this year.
In addition, this quarter, we took an impairment charge of $9.4 million primarily related to the relocation of our support center. The we expect the complete early next year.
Operating income was $199 million, an increase of 162% in the quarter of.
Adjusted operating income was approximately $201.6 million up nearly 72% from the year ago period.
Interest expense for the quarter was $37 million.
Our effective tax rate for the quarter was 20.3%.
This was lower than our normalized rate of 23% to 24% due to true ups from prior period losses, which were recognized during the quarter as a result of higher than expected earnings at.
The adjusted diluted earnings per share in the quarter was 86 cents of over 100% from last years third quarter.
During the third quarter, we generated positive free cash flow of $380 million up dramatically from $76 million in the third quarter of last year and ended the quarter with approximately 850 million in cash on our balance sheet.
Through the third quarter, our fiscal 2020 sales were $3.4 billion compare.
Comparable store sales are now positive for the year at 0.6%, a 230 basis point improvement from negative 1.7% seen through the third quarter of 2019.
We have generated free cash flow of $633 million in the first three quarters of 2020 as compared to $17 million for the first three quarters of 2019, demonstrating the strength of our model and prudent management of our business.
In September of this year, we successfully refinanced our term loan extending maturities to 2027.
As part of debt refinancing and as a demonstration of our commitment to de lever our business over the long term, we paid down $150 million in debt.
Longer term, we will continue to pay down debt with the goal of reducing our gross debt to adjusted EBITDA leverage to well below three times.
There are clearly a lot of unknowns ahead. So we are not providing formal guidance for the fourth quarter. We are pleased with the demand we have seen thus far and at this time expect fourth quarter sales growth to be fairly consistent with our October trends in the mid single digits.
We feel good about our inventory position here in the fourth quarter end as planned our selling through our seasonal inventory earlier this year.
We remain focused on ensuring we have adequate inventory in our stores.
As a reminder, our core arts and crafts categories have shorter lead times on are able to the replenished more frequently.
We continue to take a disciplined approach to pricing and promotions during the fourth quarter.
Focusing on driving traffic to our stores and websites, while working to maximize the margin dollars.
Based on our strong results year to date, we now expect performance based compensation expense to total approximately $70 million for 2020.
Ahead of our initial expectations and $55 million higher than last year.
Our Q3 results incorporated $28 billion of this expense and we expect to accrue approximately $30 million in Q4, representing an increase of $28 million compared to Q4 last year.
In addition to this performance based compensation as Ashley noted earlier, we're also pleased to be paying out in total approximately $10 million at holiday onetime bonuses to our team members without their hard work and continued dedication to serving our maker customers our strong performance would not be per.
Simple.
As we look ahead I am extremely encouraged with the trajectory of our business and progress we have made as we transform Michaels for the better.
We are confident in the strength of our business strong balance sheet predictable cash generation and our ability to drive consistent and sustainable long term growth.
Now I'll turn the call back over to Ashley.
Thanks, Mike.
On slightly over a month into our fourth quarter.
I am encouraged on the progress of Michaels team has made and how well our strategic initiatives to take hold.
We remain focused on executing our on the key pillars of our maker strategy as we work to get make Michaels a one stop shop for arts and crafts.
We will continue to focus on gaining market share as we attract and retain new customers and deepen our connection with existing customers.
We have made significant strides to sustainably improve our operations and the short period of time, and we look forward to share more on our progress on the future.
And the operator, let's move on the Q and a portion of the call.
Okay.
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The first question comes from Christopher.
Horvers of JP Morgan. Please go ahead.
Yes.
Thanks, Good morning, everybody. So my first question is you're expecting a mid single digit comp in the fourth quarter, you had talked about 20% through the end of September and obviously the at the mid single digit exit rate in October. So can you talk about what drove that was at earlier seasonal sell through.
And thus the decor category slowed down and is it fair to say it was more decorating. This year are part of like you said smaller gatherings and but more of them are you seeing that surge again here in November.
And you're just basically saying you know once we get through the holiday decor period.
That will revert back down to that on mid single digit trend.
Yes, Yeah, Chris Let me, let me start with that one so let me start first with the the Q3 aspect and I think I would say a couple of things. The first is we saw strong growth across all of our categories, including both the core arts and crafts and the seasonal offering now we did sell through our seasonal as you mentioned a little bit on.
Earlier than normal, but that aligns with our maker strategy and really making sure that we are delivering what what the customer wants overall, we think our comp strength actually bodes well and demonstrates the the proof point of our strategy the by making sure we can be the arts and crafts retailer for the maker, we're selling the items they want.
Yes at on a little bit so as you recall from our previous discussions.
In earlier calls that you know.
We tightened up the fall on Halloween by this year versus last year and that was twofold. One was we were heavy going into last year and so we.
Purposely did that improve the sell through and I would say one of our biggest issues last year was actually getting holiday product post Halloween on to the for mainly because of the excess clariphy at on Halloween. So that's kind of you actually works, we generated better sell through earlier.
In the month than we were successfully able to get called the products on the floor.
Now if you look into next year the.
For the implantation of our seat on Dcs that we're putting in will be able to the linked in the fall Halloween.
Season at the same time that we flow holiday product in tandem so you know.
Our strategy for next year will actually be even better than this year, but we were very pleased with.
How how in the fall sold through also kind of look through what that means for the holiday.
If you look at Halloween is pretty much of the best at and forget type of product you said at wants the let at sell through its.
It's pretty much on decor business for us.
And a little bit of crafting if you look at holiday, it's a little bit different though it's a longer season for us there on the tree either from the tree the Theres Giftgiving on top of Arts and crafting on top of it. So we feel good about our strategy on how we exited Q3 at end starting Q4.
So is it fair to assume that.
You debt you've seen a re acceleration here in November of because of the.
The core side end gifting side.
Yeah, I mean look I would say we are very pleased with how we have started with Q4 for both the arts and crafts and the seasonal but there's also a lot of uncertainty as we look forward through the rest of Q4 as it relates to the macro environment, both from a customer demand as it relates to kogan, but also how municipalities are treating the of the recent outbreak in the.
So we're very pleased with how the quarter of started but we want to make sure. We're you know we're prudent in our in our in our fourth quarter perspective, and that's why we've mentioned the the mid single digits got.
Got it and then my follow on on the on the cash flow side I mean your inventory.
On sort of inventory days payable days a year.
Third quarter of cash for is much higher than we had expected. So can you talk about your outlook for sort of working capital and do we have to give back some of that inventory, we build inventory to the end of fourth quarter, we'll payable days come down and then.
You have a lot of cash on you're.
Youre looking that balance capital allocation.
Why wouldn't you sit there and say you know what we could actually take another slug of debt and pay that down and you know takes on the burden off the leverage ratio or even go out there and do some combination with the share buyback given how close you are with cash.
Yes, absolutely there were a couple of different things embedded in there so.
So let me first start with the capital allocation framework and then I can address the others I think look we laid out our capital allocation framework at Investor Day, and we remain committed to at the first is ensuring the we're going to grow the business and make sure. We invest in you know in the business to demonstrate the sustainable long term growth that we know this.
You of this brand is capable of after that we look at debt repay down and we demonstrated our commitment to that as part of the refinancing where we paid back $150 million of our debt on.
Theres, then opportunistic share repurchases and then we'll consider M&A as it comes along obviously all of those are things we're considering per.
Typically given the macro environment, we wanted to make sure as we get through Q4, we understand what's happening from a consumer demand as well as you know municipalities and their actions before we continue to execute across the capital allocation framework.
To your second point around cash flow we are.
We believe that a towering strength of Michaels, both now and over the long term is it the significant free cash flow generation and we we think thats going to be something that will continue for for for years.
This year this quarter, we saw a benefit not only from the increased performance, but as part of our activities over this year from coated the went back to vendors and talk to them about normalizing our payment terms and so part of what we're seeing now is the benefit of that some of that will come back in Q1, as we fulfill our obligations to those terms.
But it doesn't change the fact, the we expect Michaels over the long term to continue to generate significant free cash flow.
Got it at best of luck with the holidays.
Thank you.
The next question comes from Seth Sigman of Credit Suisse. Please go ahead.
Hey, good morning, everybody on this.
Curious given the progress this year can you elaborate on some of the strategic and operational drivers plan for next year for 2021 end gives us a sense.
As to the puts and takes for sales as you have to lap. Some of these strong results. It would seem like you should be able to still gross sales next year, but would be great to get your thoughts on that thanks.
Yes from a cash from our strategic growth pillars that we outlined at Investor day.
I'm very pleased with the progress we're making so if you look at going into next year, we expect.
Significant improvements our omni channel enhancements for that's biologic of in store curbside.
We're going to work a lot on the.
Product and category management, as we bring newness to the floor and we will continue to make progress on our pricing promotional cadence on effectiveness as we did this last quarter as you look at the backup at 21, our sees on distribution centers should be set up and running that will enable us to flow product much more effectively and reduced our lead times increase.
In stocks increased labor productivity all of that should take hold.
And from a book.
Keep it at a rating improved the customer experience will be rolling out shopping scan other services in the back half of 21 as well.
I see us continuing to expand Michaels pro is that's been a positive offering to our customers and other b to b offerings as well.
Okay. That's helpful. On as you think of now profitability and the operating margin of the business into next year I would think some cost come back as you lap store closings from earlier in the year of but you also have plenty of incremental costs. This year, you talked about the incentive comp the bonus and I'm sure there were other cobot costs right.
So should we be thinking about flow through improving into next year and net you should be in a position to expand operating margins.
Yes look I mean, thats, what I would say first of all is for 2021 perspective, we're still going through the at the planning process and so we're not going to be providing formal guidance on on 21 as I think through even the the fourth quarter and some of its implications we continue to be focused on making sure were.
Disciplined.
From a from a pricing and promotional perspective on it doesn't mean, we're necessarily going to be at the exact same promotional levels as we think through the implications of of co hvid and coming out of the holding period in 2021 on.
Lastly, we're comfortable from an E commerce perspective that a meaningful portion of our E. Com is focused on BOPUS curbside and same day, where our customers bear the fulfillment costs and therefore, we are profitable from an E. Commerce perspective overall, our key focus is making sure. We continue to grow gross profit dollars on the long term.
And believe overtime the debt will help scale the business.
Okay. Thanks for that in the again nice progress in the good luck in holiday period.
Thank you.
The next question comes from Joe Feldman of Telsey Advisory Group. Please go ahead.
Great. Thanks for taking the question guys on one or two.
Follow up you talked about you know the the in the three pillars of the merchandising side of things.
And.
Focusing on improving various departments around store.
You talked about future doing more I was just curious if you could share any thoughts on what some of those might be like what at what's next up.
That you'd like to improve to help drive of the business.
Yeah, we're doing our category management process across every category in the box at the longer lead time as you know the this category. The this company of long lead times on product, but were going through every category and improving newness.
The <unk> improving product development, we're actually making at where it goes from truck to show for it fits on the shelf so it reduces touches on.
Reducing our lead times, improving our case packs, which allows us to be more effective and efficient at store level. So there is a lot of work to be done I'm pleased with the beginnings of at as we've got newness and got the the natural kind of specialty retailer Merchandizing pyramid correct, but there's still a lot of work to do around improving truck the shelf at.
The efficiency of store at store level. So we will see that rollout throughout next year at I'm very pleased with how that's coming along.
Okay. That's great. Thanks, and then just one follow on with regard to.
For the surgeon covert cases, we've seen around the country have you seen any recent changes in demand trend I mean, obviously the again at the mid single digit that's flow through the quarter, but I don't know if that was related.
For.
Is that and is there any anticipation that you might have to close stores in some markets again.
Thanks.
Well, it's a good question I mean, we haven't seen any real change end demand regionality outside of obviously, Canada, where they they close of a certain certain areas you do see obviously demand on the stores actually close.
Theres just recently the input in different capacity limits, we haven't seen the tremendous impact of that but obviously you know, we're very well aware of what could happen. If you know if we go back the March April we don't anticipate the but obviously we plan we have a very robust.
Robust playbook, if we have to go back to the.
We weathered the storm very effectively and we are better positioned now the weather then and then we weren't end. So we're prepared for all optionality at all things that might happen, but right now we're assuming that we're going to get through this just like just like we did last on but better because we don't foresee a rolling closure by the mentality, but like I said.
The who really knows otherwise the group, we will be providing guidance. So.
We are allowing ourselves optionality.
At at that's great. Thanks, Good luck with this quarter guys. Thank you.
The next question comes from Simeon Gutman of.
Morgan Stanley please.
Okay.
Hey, good morning. Thanks, everyone. My question first is on gross margin can you talk through some of the drivers in Q3, what was the recapture.
Sort of what's sustainable and if you have an easier comparison it looks like on the fourth quarter.
Is there any reason why it can't look similar, especially with the inventory position looking solely.
Yes, sure. So Simeon I would say there were first of all we were obviously very very pleased with where the where the quarter came in from a gross profit perspective, you know an increase of of $140 million, where it was quite significant there were really two drivers that drove that number in the third quarter.
The first was disciplined promotional and pricing.
How we tackle that relative to where we were over the last quarter that that is something we will continue to be we will continue to make sure we're being smart and thoughtful on our pricing at our promotional cadence.
How how that how the ultimately gets executed for me for me quarter over quarter perspective year over year is a little tough to know at this early in the quarter. The second driver is occupancy cost leverage which as a reminder, as an expense. That's included in our gross profit on.
Obviously, when when you of comps that are of that are up 16.3, you're able to get a significant amount of leverage on on the boxing on our operations.
For the mid single digits.
That won't be as significant but obviously, we would still hope to be efficient with our box, even even at that level.
Got it great and just to clarify I think you said regarding the quarter to date and why you're being somewhat careful with your on your fourth quarter. He be exit rate that you provided even though there wasn't guidance is that you are seeing some pull forward in some of the I guess seasonal product for holiday product and you want to be tentative about how you how you look at the.
And then at this isn't the unrelated part of the follow ups I apologize can you talk about free both in terms of last mile and sort of enter supply chain expenses. This is something that had come up with Michaels on the past curious how it looks like going into 2021.
Yes, So let me.
Let me tackle both of those so we.
Our exit rate in October and then what we've indicated for for Q4 is mid single digits. We're very pleased with how the quarter of started but if you look at the cadence of our seasonal sell through.
In Q3. It also makes us think through the the seasonal profile of the queue for business as well, which is what gives us comfort in the mid single digit number. It's also admittedly Ashley mentioned this from a from a what's the municipalities are doing we're just not sure how society quite frankly is going to react over the next week's end so.
We want to make sure we're being prudent as we think through the potential implications of that from a from a free perspective.
It is something we keep an eye on obviously everyone in the industry is bearing on was buried increased free cost we have a great relationship with a lot of our providers to make sure that we won't face capacity constraints in terms of getting our product out, but it's something we continue to keep an eye on as we try to manage the business.
Inc.
From a from an omni channel or ecommerce perspective on freight of big portion of our sales in each of our still comes from BOPUS.
Curbside and same day delivery, so we benefit from the mix change versus probably others out of sync.
Thank you.
The next question comes from Kate Mcshane of Goldman Sachs. Please go ahead.
Hi, Good morning, Thanks for taking my question on most of mine of been answered already but I was curious.
To learn more about the new customer is that you saw during the quarter, just curious who they were and what their behavior is one of the versus your more regular customers.
Are you are you seeing more bigger basket sizes are trading up or any kind of the insight into on.
The repeat purchases.
Well say this we're pleased with the total customer profile of with our existing customers.
The anymore share of wallet and we're we're pleased with our new customer acquisition as well it's been a broad based demand across all the categories, which were very pleased with the not just seasonal but particularly our replenishable are the core arts and craft business. It's been a broad based demand across all customer types. So we're very pleased with that because.
It indicates that our focus on our core customer our maker customer is the right strategy.
We're not too reliant on just seasonal to drive it and that's been the plan for a while on it it's clear that's actually working at paying off.
I wondered if you could just comment at the follow up question with regards to holiday I know gifting is an important piece of the.
For is there any way to quantify I.
Gifting at the percentage of sales on the in the fourth quarter and how that breaks down between.
No more child oriented like toys craft persons.
Just general adult gifting.
The next said earlier, there is actually kind of three parts to our holiday seasonal business, which is.
The tree for the trend the free part and then the gift giving piece, but we.
I'd be remiss. The also not mentioned they are actually the for part which is early kind of arts and crafts around holiday. So we have for parts of it the arts and crafts starts really early demonstrating the tree archery than trajectory than gift, giving and we.
We don't breakout, which segment, but with that being said historically, we'd be really focused on those for.
Segment specifically.
What's great about what we're doing now is the true arts and crafts business, our SP or potential business.
It is also doing very well and so its just core arts and crafts as well. So it's a broad based demand that we feel we feel very positive about.
Thank you.
The next question comes from William Reuter of Bank of America. Please go on.
Good morning.
You mentioned that of the two large gross margin drivers one of them was lower pricing and promotions given high conversion and intend to purchase when customers are in stores. How much of this do you think is due to the environment and how much of this would you attribute to your own strategies.
Yeah, I mean look it's there's going to be it's tough to really tease that out right now, particularly given what's going on from a macro environment from a co. The perspective I think we feel we feel really good about our strategy both in the macro environment, we face right now and going forward.
That we want to be disciplined around pricing and promotion. It's obviously not just about the pricing promotion. It's about the offer you have executing the strategy across the three pillars, and then having the pricing and promotional cadence that actually supports that so you know I'm not I'm not going to alliance. The obviously I think we have benefited from it from a consumer demand for.
Expected based on the current macro environment, but I also think that our ability to have the right seasonal assortment that sells through earlier at at a higher rate is as much to do with how were actually executing against the categories as it is around our pricing and promotion of.
At on to that a little bit. So if you can go back on a call or two we talked about tightening of the holiday buys which we did.
Two things the also that I didn't mention is it's more unique products. So it's less commodity is less of mass. So when we tightened up the buy and you got more unique product at sold earlier right and the fact that the customer is like the product, we didn't feel and didnt need to remote as deeply as we did last year. It was it was a shift in basic product merchandising.
The more to a specialty retailer of product merchandising versus mass and we will continue to follow that formula into next year because.
You can get the commodity mass the and a lot of places we focus on unique product and you and less of the depth on the quality of we buy and so thats why we had a better solar and I think that the good methodology for seasonal buys going forward.
Very helpful I'll pass the others. Thank you.
The next question comes from Steven Forbes with Guggenheim Securities LLC. Please go.
Good morning, So I wanted to focus on the store resetting initiatives.
Actually if you can provide us an update on the reset plans right as we think about next year, both in terms of cadence and breath of.
And then and then help us quantify or at the potential cost implications.
Of the rollout.
As we sort of try to optimize the model yet I think what I'm trying to best understand is what the level of investment spend pressure on the business is going to be at.
In the first half right, where we have that those lower volume quarters.
Yes, so it's a rolling reset by category. So you'll have in pretty much all year right up so the fourth quarter.
The.
The cost of the resets is is.
It's very minimal in the sense of this is kind of what we do we've dramatically made the resets more efficient by how we go from truck the shelf.
The SKU optimization case back optimization, so the ability to put that product on the shelf on our initial kind of part of reset should be much more efficient than the has in the past. So we don't see a lot of headwind from what you call a modular resets on product reset the refreshes in the stores next year.
And then just the maybe sticking with the expenses given the.
The the both at the holiday bonus payment to the team members that was announced can you just update us on where your average entry wage is today and then how you're thinking about your just the average wage rates in 21 versus say a baseline of 2019.
Yeah, I mean, we're we're committed to making sure that we pay a competitive wage in the markets and then you know at and we keep an eye on that across our stores by municipality to make sure we're competitive.
Thank you best of luck.
Thank you.
And the last questioner today will be Carla Casella with JP Morgan. Please go ahead.
Hi, and given your gross and Bopis income I can you give us the sense for the margin the on on at Bopis, our credit Fitel versus in store.
On product margin.
Congrats on.
As we said in the past the of.
BOPUS curbside same day delivery.
As basically equivalent to that end store purchase.
Okay, Great and then on the working capital front, you mentioned that you were actually you can combat payable terms on it looks like there's been some of their cost at were deferred on.
Could we see working capital flow.
Net then be a use of cash on fourth quarter and on typical eight at both to the the seasonal patterns of the past areas or is most of that kind of get paid back down in 21.
Hi, 2021 is the is the short direct answer.
We will see that largely in the early part of next year.
Okay, great. Thanks, a lot.
This concludes our question and answer session and today's call. Thank you for attending today's presentation. You may now disconnect.
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