Q2 2024 Savers Value Village Inc Earnings Call
Speaker Change: Good afternoon and welcome to Savers Value Village's conference call to discuss financial results for the second quarter ending June 29, 2024. At this time, all participants are in a listen-only mode.
Operator: call to discuss financial results for the second quarter ending June 29th, 2024. At this time, all participants are in a listen-only mode.
Operator: 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. Furthermore, certain comments made during this call may constitute forward-looking statements that are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from expectations or historical performance.
Speaker Change: Later, we will conduct a question and answer session and instructions will follow at that time. Please note that this call is being recorded in a replay of this call and related materials.
Speaker Change: 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.
Speaker Change: Certain comments made during this call may constitute forward-looking statements which are subject to significant risks and uncertainties that could cause the company's actual results to differ materially from expectations or historical performance.
Operator: Please review the disclosure on forward-looking statements included in the company's earnings release and filings with the SEC for a discussion on these risks and uncertainties. Please be advised that these 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.
Speaker Change: Please review the disclosure on forward-looking statements included in the company's earnings release and filings with the SEC for a discussion on these risks and uncertainties.
Speaker Change: Please be advised that the 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.
Speaker Change: The company may also discuss certain non-GAAP financial measures. As 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.
Operator: 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 filing. Joining from the Management on today's call are Mark Walsh, Chief Executive Officer, Jubran Tanious, President and Chief Operating Officer, and Michael Mar, Chief Financial Officer. Mr. Walsh, you may go ahead, sir.
Speaker Change: Joining from the management on today's call are Mark Walsh, Chief Executive Officer, Jubran Tanious, President and Chief Operating Officer, and Michael Marr, Chief Financial Officer. Mr. Walsh, you may go ahead, sir.
Mark Walsh: Thank you. Good afternoon, everyone.
Mark Walsh: Thank you. Good afternoon, everyone. We appreciate you joining us today. Let me just start by laying out the highlights to the quarter and the way we are developing the business.
Mark Walsh: And then I'll touch on each of these a little further.
Mark Walsh: Our U.S. business performed well in the second quarter with results that were in line with our expectations.
Mark Walsh: Our results in Canada were below our expectations, which we believe was driven primarily by macroeconomic factors.
Mark Walsh: We feel very good about our pipeline of new stores and the performance of our recently opened stores.
Mark Walsh: Our donation trends remain strong and we continue to invest in a multifaceted supply and processing strategy that unlocks growth.
Mark Walsh: We appreciate you joining us today. Let me just start by laying out the highlights of the quarter and the way we are developing the business. And then I'll touch on each of these a little further.
Mark Walsh: Are U.S. businesses performing well in the second quarter with results that were in line with their expectations? or results in Canada were below our expectations, which we believe was driven primarily by a natural economic fact. We feel very good about our pipeline of new stores and the performance of our recently opened stores. Our donation trends remain strong, and we continue to invest in a multifaceted supply and processing strategy that unlocks growth. Let me now touch on each of these in a little greater detail.
Mark Walsh: Let me now touch on each of these in a little greater detail. African sales trends in our U.S. business remain solid throughout the quarter with consistent low single-digit increases in both transactions and average basket. While our business in Canada softened as the quarter progressed.
Mark Walsh: Over the past few quarters, the Canadian economy has faced significant headwinds.
Mark Walsh: GDP per capita has declined, and the unemployment rate has risen from 5.7% to 6.4% just in the first half of this year.
Mark Walsh: Canadian household debt is over a hundred percent of GDP and household debt service costs have increased sharply to over 15% of household income.
Mark Walsh: Housing and affordability are a core issue. Canadian home mortgages typically require an interest rate reset every few years, resulting in substantially higher mortgage payments at today's rates relative to a few years ago. Renters face similar cost pressures as Canadian rent inflation is up double digits over the last two years, and new housing and apartment supply remains of yearly concern. Against this backdrop, Canadian consumers are cutting back on discretionary categories such as apparel and health.
Mark Walsh: Both are near historic highs.
Mark Walsh: Housing affordability is a core issue.
Mark Walsh: Canadian home mortgages typically require an interest rate reset every few years, resulting in substantially higher mortgage payments at today's rates relative to a few years ago.
Mark Walsh: Renters face similar cost pressures as Canadian rent inflation is up double digits over the last two years and new housing and apartment supply remain severely constrained.
Mark Walsh: Against this backdrop, Canadian consumers are cutting back on discretionary categories such as apparel and housewares.
Mark Walsh: According to retail sales data published by Statistics Canada, total sales of peril and footwear fell during the first four months of the year, with its decline accelerating as the year progresses. We also know from our consumer survey data that thrift shoppers, many of whom are at the low end of the income scale, are experiencing greater financial stress than the population at large.
Speaker Change: According to retail sales data published by Statistics Canada, total sales of apparel and footwear fell during the first four months of the year, with a decline accelerating as the year has progressed.
Speaker Change: While we also know from our consumer survey data that thrift shoppers, many of whom are at the low end of the income scale, are experiencing greater financial stress than the population at large.
Mark Walsh: We see this playing out in our business in Canada, where our customers skew younger and lower income than the general population. We are capturing some trade-down for consumers who are reducing their spend at non-discount retailers, but unfortunately, this is more than offset by weakness in our lower income customer cohort.
Speaker Change: We see this playing out in our business in Canada, where our customers skew younger and lower income than the general population.
Speaker Change: We are capturing some trade-down from consumers who are reducing their spend at non-discount retailers. But unfortunately, this is more than offset by weakness in our lower income customer cohorts.
Mark Walsh: Macro conditions aside, we are focusing on managing what we can control and continuing to strengthen our offering and value propositions to the Canadian consumer. With an average unit retail of $5 U.S., we provide tremendous value, and we have strong customer loyalty. Active member counts grew by double digit percentage in Canada over the last year, and we continue to see very low attrition from our loyalty program among our highest and best spenders. We're continuing to test approaches to drive foot traffic, increase conversion, and improve our overall value perception among consumers. While we are certainly not content with our results in Canada, we remain confident in our long-term health.
Speaker Change: Macro conditions aside, we are focusing on managing what we can control and continuing to strengthen our offering and value propositions to the Canadian consumer. With an average unit retail of $5 US, we provide a tremendous value and we have strong customer loyalty.
Speaker Change: Active member counts grew by double digit percentage in Canada over the last year and we continue to see very low attrition from our loyalty program among our highest and best spenders.
Speaker Change: We're continuing to test approaches to drive foot traffic, increase conversion, and improve our overall value perception among consumers.
Speaker Change: While we are certainly not content with our results in Canada, we remain confident in our long-term outlook. We enjoy 95% brand awareness in Canada and estimate that one in three households shop with us.
Mark Walsh: We enjoy 95% Brand Awareness in Canada and estimate that 1-3 households shop. In addition, our Canadian business remains profitable. With all but one of our comp stores, they are generating positive four-wall contribution despite their current top line. And our survey data indicate that our core Canadian consumers plan to increase their spending at thrift stores as their incomes increase. These strengths give us confidence in our ability to navigate the cyclical downturn and emerge well positioned for continued growth. Despite the macro headwinds of Canada, long-term growth plans continue to gain momentum.
Speaker Change: In addition, our Canadian business remains profitable, with all but one of our contours, they are generating positive for a wall contribution, despite current top line headwits.
Speaker Change: and our survey data indicate that our core Canadian consumers plan to increase their spending at thrift stores as their incomes grow.
Speaker Change: These strengths give us confidence in our ability to navigate the cyclical downturn and emerge well-positioned for continued success.
Speaker Change: Despite the macro headwinds in Canada, our long-term growth plans continue to gain momentum. This year we are on track to open our targeted number of 22 stores plus an additional seven from the two peaches acquisition for a total of 29 new stores.
Speaker Change: We also feel good about the trajectory of our new stores for next year, with an initial plan of 25, and a more balanced, quarterly, cadence to our opening schedule.
Speaker Change: We opened four new stores and acquired seven 2-Pizza stores in the second quarter. Our new stores in total are exceeding our expectations, with the US stores performing especially strong.
Mark Walsh: We have a tremendous growth opportunity in front of us, particularly in the United States, where thrift is still a highly fragmented and emerging sector, with just 165 stores in the U.S. We are under-penetrated in most major markets that we currently operate in, and we have virtually no presence in major regions of the country, such as the South and the Southeast.
Speaker Change: We have a tremendous growth opportunity in front of us, particularly in the United States, where thrift is still a highly fragmented and emerging sector.
Speaker Change: With just 165 stores in the U.S., we are under-penetrated in most major markets that we currently operate in, and we have virtually no presence in major regions of the country as the South and the Southeast.
Mark Walsh: The U.S., which currently accounts for approximately half-hour stores, sales, and earnings will increasingly drive our growth going forward. Roughly 60% of our new star openings in 2025 will be in the U.S., and that percentage will continue to grow. Overall, we expect new stores to be the primary driver of high single-digit total annual sales growth over the long term. Turning now to supply donations, donations were very strong in the second quarter, and this has been a trend for some time. On-site and green droplet donations grew 6% over the last year and were 78% of the total pounds product.
Speaker Change: The U.S., which currently accounts for approximately half our stores, sales, and earnings, will increasingly drive our growth going forward.
Speaker Change: Roughly 60% of our new store openings in 2025 will be in the U.S. And that percentage will continue to grow. Overall, we expect new stores to be the primary driver of high single-digit total annual sales growth over the long term.
Speaker Change: Turning now to supply, donations were very strong in the second quarter and this has been a trend for some time. On-site and green drop donations grew 6% over last year and were 78% of total pounds processed.
Mark Walsh: As our efforts to provide our nonprofit partners, donors, a convenient, efficient, and friendly experience continue to gain traction, with speculation volumes to remain strong, we are focused on expanding our network of donation locations to take advantage of these trends and continue improving the quality and control of our supply. With strong outside donations, a growing network of mobile donation locations, and long-established relationships with their non-profit partners, we project supply will be more than sufficient to support our existing stores and new store expansion for the foreseeable future.
Speaker Change: As our efforts to provide our nonprofit partners, donors, a convenient, efficient, and friendly experience continue to gain traction, we expect donation volumes to remain strong.
Speaker Change: We are focused on expanding our network of donation locations to take advantage of these trends and continue improving the quality and control of our supply.
Speaker Change: With strong onsite donations, a growing network of mobile donation locations, and long-established relationships with our nonprofit partners, we project supply to be more than sufficient to support our existing stores and new store expansion for the foreseeable future.
Speaker Change: Equally important to our strategic positioning and scaling of our business is off-site processing.
Speaker Change: Over the last several years, we have made a number of investments to enhance our processing capabilities, especially in off-site facilities, including central processing centers and warehouse processing facilities.
Mark Walsh: These off-site processing capabilities enable us to open stores and locations that, for various reasons, can't support onsite product. This is a critical unlock for our new store growth plan, and it has already enabled us to significantly expand the field of play as we scout potential new stores. With half of our new stores going forward will leverage some form of offsite processing, while all site processing has been a big win for us.
Speaker Change: These off-site processing capabilities enable us to open stores and locations that for various reasons can't support onsite processing.
Speaker Change: This is a critical unlock for our new store growth plans.
Speaker Change: and it has already enabled us to significantly expand the field of play as we scout potential new store sites.
Speaker Change: More than half of our new stores going forward will leverage some form of off-site processing.
Speaker Change: While off-site processing has been a big win for us.
Mark Walsh: We are in the early stages of building these capabilities, but as we continue to gain experience, we are driving greater operational efficiency to increase throughput and process improvement. At our Edmonton Central Posing Center, the first one we opened in 2021, cost per unit has continued to decline and is now approaching the cost of traditional on-site processing in a store. This is a significant development for our expansion initiative. Achieving near parity in cost between the different processing approaches will enable more profitable long-term growth and make off-site processing an even more important competitor differentiator.
Speaker Change: We are in the early stages of building these capabilities. As we continue to gain experience, we are driving greater operational efficiency through increased throughput and process improvements.
Speaker Change: At our Edmonton Center Possing Center, the first one we open in 2021, cost per unit has continued to decline and is now approaching the cost of traditional on-site processing in a store. This is a significant development for our expansion initiatives.
Speaker Change: Achieving near parity in cost between the different processing approaches will enable a more profitable long-term growth and make off-site processing an even more important competitor differentiator for us.
Mark Walsh: In closing, we recently marked the one year anniversary of our debut as a public company. Since that time, we've achieved a number of important milestones. We've accelerated the pace of our new store openings, and offsite production is now a proven unlock for new store growth. We've entered new markets, including the southeastern U.S. and Sydney, Australia, and our loyalty membership is growing double digits. I couldn't be proud of the highly dedicated team members who have made all of this possible.
Speaker Change: In closing, we recently marked the one-year anniversary of our debut as a public company.
Speaker Change: Since that time we've achieved the number of important milestones, we've accelerated the pace of our new store openings.
Speaker Change: Office for Production is now a proven unlock for a new store growth. We venture new markets including the Southeastern U.S. and Sydney Australia. And our loyalty membership is growing double digits. I couldn't be proud of the highly dedicated team members who have made all of this possible.
Mark Walsh: Even as we navigate a difficult Canadian economic environment, I am more confident than ever in our long-term growth process and in our mission to make secondhand second. Now, I'll hand the call over to Michael to discuss our financial performance and the outlook for the remainder of the year.
Speaker Change: Even as we navigate a difficult Canadian economic environment, I am more confident than ever in our long-term growth prospects.
Speaker Change: and in our mission to make secondhand second nature.
Speaker Change: Now I'll hand the call over to Michael to discuss our financial performance and the outlook for the remainder of the year.
Michael Mar: Thank you, Mark, and good afternoon, everyone. It's a pleasure to be here at Savers Value Village and participate in my first earnings call with the company. As most of you are aware, I joined Savers in May and have spent the first few months in the field and familiarizing myself with the business and the team. I find many reasons to be excited about this company, including its unique business model, significant long-term growth potential, highly engaged customers, and talented teams.
Michael Marr: Thank you Mark, and good afternoon everyone.
Michael Marr: It's a pleasure to be here at Savers Value Village and participating on my first earnings call with the company. As most of you are aware, I joined Savers in May and have spent the first few months in the field and familiarizing myself with the business and the team.
Speaker Change: I find many reasons to be excited about this company, including its unique business model, significant long-term growth potential, highly engaged customers, and talented team.
Michael Mar: My priorities are increasing shareholder value, strengthening our finance capabilities, and evolving our approach to planning and forecasting the business across both near-term and longer-term time horizons. There is a strong foundation to build on, and I'm looking forward to working with the finance team and our business partners to help the company achieve its full potential.
Speaker Change: My priorities are increasing shareholder value, strengthening our finance capabilities, and evolving our approach to planning and forecasting the business across both near-term and longer-term time horizons.
Michael Marr: There is a strong foundation to build on, and I'm looking forward to working with the finance team and our business partners to help the company achieve its full potential.
Michael Mar: Our second quarter was highlighted by the acceleration of our new store growth plan, better-than-expected performance in our new stores, especially in the U.S., and continued progress in off-site processing. Our U.S. business was consistent with our expectations and first quarter trends. But sales and earnings in Canada were lower than we expected due to the challenging Canadian economic environment. Despite the softness in Canada, our adjusted EBITDA margin was over 20% for the quarter, and we continue to generate strong cash flow. Highlighting the resilience of our Financial Model and turning the out of the income state.
Speaker Change: Our second quarter was highlighted by the acceleration of our new store growth plans, better than expected performance in our new stores, especially in the U.S., and continued progress in off-site processing.
Michael Marr: Our U.S. business was consistent with our expectations and first quarter trends, but sales and earnings in Canada were lower than we expected due to the challenging Canadian economic environment.
Speaker Change: Despite softness in Canada, our adjusted EBITDA margin was over 20% for the quarter, and we continued to generate strong cash flows, highlighting the resilience of our financial model.
Michael Mar: Total net sales increased 2% to $387 million in the second quarter. On a constant currency basis, net sales increased 2.8% and comparable source sales decreased 0.1%. In the US, net sales increased 5.4% to $207 million, and comparable stores sales increased 2.1%. Given growth in both transactions and average fast.
Michael Marr: Turning now to the income statement.
Speaker Change: Total net sales increased 2% to $387 million in the second quarter.
Speaker Change: On a constant currency basis, net sales increased 2.8% and comparable store sales decreased 0.1%.
Michael Marr: In the U.S., net sales increased 5.4% to $207 million, and comparable store sales increased 2.1%, driven by growth in both transactions and average baskets.
Michael Mar: In Canada, net sales declined 2.4% to $150 million, and comparable store sales declined 3.1%, driven by declines in both transactions and average baskets. A timing shift in the Canada Day holiday benefited Canadian comparable store sales by approximately 100 basis points in the second quarter, and is expected to negatively impact the third quarter by roughly the same amount. Cost of merchandise sold as a percentage of net sales increased 120 basis points to 42.1%, with the increase reflecting the impact of new stores and the two new central processing centers that were opened in the second half of last year, as well as deleverage on lower sales in Canada.
Speaker Change: In Canada, net sales declined 2.4% to $150 million, and comparable source sales declined 3.1%, driven by declines in both transactions and average basket.
Speaker Change: A timing shift in the Canada Day holiday benefited Canadian comparable store sales by approximately 100 basis points in the second quarter, and is expected to negatively impact the third quarter by roughly the same amount.
Speaker Change: Cost of merchandise sold as a percentage of net sales increased 120 basis points to 42.1 percent.
Speaker Change: with the increase reflecting the impact of new stores and the two new central processing centers that were opened in the second half of last year, as well as de-leverage on lower sales in Canada.
Michael Mar: As a reminder, our new stores typically open at roughly half of their mature sales, resulting in lower profit margins in their first few years. As we accelerate growth, new stores will be a headwind to profit margins in the short term. However, this headwind will subside as we continue to open stores at a sustained pace and our new store classes begin to mature.
Speaker Change: As a reminder, our new stores typically open at roughly half of their mature sales levels.
Speaker Change: resulting in lower profit margins in their first few years.
Speaker Change: As we accelerate growth, new stores will be a headwind to profit margins in the short term. However, this headwind will subside as we continue to open stores at a sustained pace and our new store classes begin to mature.
Michael Mar: Investments and new stores generate strong returns on our capital, and the performance of our recently opened stores gives us added confidence in our growth. Investments in off-site processing are also impacting our cost of merchandise sold. Offsite processing entails additional activities and costs, including freight and overhead, resulting in pressure on our profit margins when we open a central processing center or other offsite facility and work through the initial ramp-up. However, as we increase throughput and improve productivity in these facilities, the cost per unit declines, providing a tailwind to profit margins. That's exactly what we're seeing in our three more mature central processing centers.
Speaker Change: Investments in new stores generate strong returns on our capital and the performance of our recently opened stores gives us added confidence in our growth plans.
Speaker Change: Investments in off-site processing are also impacting our cost of merchandise sold. Off-site processing entails additional activities and costs, including freight and overhead, resulting in pressure on our profit margins when we open a central processing center or other off-site facility and work through the initial ramp-up.
Speaker Change: However, as we increase throughput and improve productivity in these facilities, the cost per unit declines, providing a tailwind to profit margins.
Speaker Change: That's exactly what we're seeing in our three more mature central processing centers.
Michael Mar: During the second quarter, unit cost reductions in these three CPCs partially offset the combined effects of new stores and new CPCs. The remaining increase in cost of merchandise sold as a percentage of net sales resulted from the leverage on lower sales in Canada. We have reduced processing levels in Canada in response to demand to mitigate the delivery of our labor costs on lower sales. We continue to monitor this closely as we work to balance profit margins and the continued flow of fresh product to drive sales. Continuing down the income, salaries, wages, and benefits expense was 91 million dollars, excluding 20 million dollars of IPO-related stock-based compensation.
Speaker Change: During the second quarter, unit cost reductions in these three CPCs partially offset the combined effects of new stores and new CPCs.
Speaker Change: The remaining increase in cost of merchandise sold as a percentage of net sales resulted from deleverage on lower sales in Canada.
Speaker Change: We have reduced processing levels in Canada in response to demand to mitigate the deleverage of our labor costs on lower sales.
Speaker Change: We continue to monitor this closely as we work to balance profit margins and the continued flow of fresh product to drive sales.
Speaker Change: Continuing down the income statement.
Speaker Change: Salaries, Wages, and Benefits Expense was $91 million.
Speaker Change: Excluding $20 million of IPO-related stock-based compensation, salaries, wages, and benefits as a percentage of net sales increased 60 basis points to 18.4%, reflecting the impact of new stores and higher wages and benefits.
Speaker Change: Selling general and administrative expenses as a percentage of net sales increased 230 basis points to 21.6 percent, primarily due to new stores and pre-opening expenses, along with information technology and general store expenses.
Speaker Change: Depreciation and amortization increased 18% to $17 million, reflecting our growth investments in new stores, central processing centers, and automated book processing systems.
Speaker Change: Interest expense decreased 43% to $16 million due to reduced debt and lower average interest rates.
Michael Mar: Gap net income for the quarter was $9.7 million, or $0.06 per diluted share. Adjusted net income was $23.7 million, or $0.14 per diluted share. Second Quarter adjusted EBITDA was $80 million, and the adjusted EBITDA margin was $20.7%. Turning now to capital allocation. We remain committed to a disciplined approach that funds our growth and strengthens our balance sheet. As our business continues to generate strong cash flow, we will also be opportunistic in returning capital to shareholders.
Gap: Gap net income for the quarter was $9.7 million or $0.06 per diluted share.
Justin: A Justin net income was $23.7 million or 14 cents per diluted chair.
Speaker Change: Second quarter adjusted EBITDA was $80 million, and adjusted EBITDA margin was 20.7%.
Speaker Change: Turning now to capital allocation, we remain committed to a disciplined approach that funds our growth and strengthens our balance sheet. As our business continues to generate strong cash flow, we will also be opportunistic in returning capital to shareholders.
Michael Mar: We remain on track for 29 new stores this year, and we expect operating cash flow to be more than sufficient to fund our capital expenditure. We've also taken a number of steps to strengthen our balance sheet. In January, we amended our Senior Security Credit Agreement, which combined with the corresponding upgrade of our debt rating, lowered our borrowing rate spread by 175 basis points. In March, we paid down $49.5 million of principal on our senior secured notes.
Speaker Change: We remain on track for 29 new stores this year and we expect operating cash flow to be more than sufficient to fund our capital expenditures.
Speaker Change: We've also taken a number of steps to strengthen our balance sheet this year.
Speaker Change: In January, we amended our Senior Secured Credit Agreement, which combined with a corresponding upgrade of our debt rating, lowered our borrowing rate spread by 175 basis points.
Speaker Change: In March, we paid down $49.5 million of principal on our senior secured notes.
Michael Mar: In April, we terminated our interest rate and cross-currency swaps and realized net proceeds of $38.4 million. And in June, we upsized a revolving line of credit by $50 million, from $75 million to $125 million, and extended its maturity by one year to $2027. We finished the second quarter with $161 million of cash and cash equivalents and a net leverage ratio of 1.9 times. Also, during the second quarter, we repurchased approximately 288,000 shares of our common stock at an average price of $11.51 per share.
Speaker Change: In April , we terminated our interest rate in cross-currency swaps and realized net proceeds of $38.4 million.
Speaker Change: And in June , we upsized our revolving line of credit by $50 million, from $75 million to $125 million, and extended its maturity by one year to 2027.
Speaker Change: We finished the second quarter with $161 million of cash in cash equivalents and a net leverage ratio of 1.9 times.
Speaker Change: Also, during the second quarter, we repurchased approximately 288,000 shares of our common stock at an average price of $11.51 per share.
Michael Mar: Additional repurchases since the end of the quarter have brought our total to 1.4 million shares we purchased on that date at an average price of $10.51 per share. As of today, we have approximately $35 million remaining on our share of purchase authorization.
Speaker Change: Additional repurchases since the end of the quarter have brought our total to 1.4 million shares repurchased to date at an average price of $10.51 per share.
Speaker Change: As of today, we have approximately $35 million remaining on our share of purchase authorization.
Michael Mar: Finally, let me discuss our updated outlook for 2024. Given the continuing macroeconomic headwinds in Canada, we believe a more cautious outlook is warranted. We are lowering our full year 2024 outlook for total net sales to a range of $1.53 billion to $1.56 billion and comparable store sales to a range of down 1% to up 1%, with the US up low single digits and Canada down low to mid single digits. Net income is in a range of $42 million to $56 million, adjusted net income is in a range of $82 million to $96 million, and adjusted EBITDA is in a range of $290 million to $310 million.
Speaker Change: Finally, let me discuss our updated outlook for 2024.
Speaker Change: Given the continuing macroeconomic headwinds in Canada, we believe a more cautious outlook is warranted.
Speaker Change: We are lowering our full year 2024 outlook for total net sales to a range of $1.53 billion to $1.56 billion.
Speaker Change: comparable store sales to a range of down 1% to up 1%.
Speaker Change: [inaudible] U.S.
Speaker Change: Net income to a range of $42 million to $56 million.
Speaker Change: adjusted net income to a range of $82 million dollars to $96 million dollars and adjusted EBITDA to a range of $290 million dollars to $310 million dollars.
Michael Mar: Our full year 2024 outlook remains unchanged for new store openings and capital expenditure. We're still expecting a total of 29 new stores this year, which includes 22 organic openings and the seven acquired Two Peaches locations. The 18 stores planned for the second half of the year will open roughly evenly between the 3rd and 4th quarters. We're also closing two stores with expiring leases during the third quarter, bringing net new stores to our growth for the year to 27.
Speaker Change: Our full year 2024 outlook remains unchanged for new store openings and capital expenditures.
Speaker Change: We're still expecting a total of 29 new stores this year, which includes 22 organic openings and the seven acquired Two Peaches locations.
Speaker Change: The 18 stores planned for the second half of the year will open roughly evenly between the third and fourth quarters.
Speaker Change: We're also closing two stores with expiring leases during the third quarter, bringing net new store growth for the year to 27.
Michael Mar: Capital expenditures are still planned in the range of $105 million to $115 million. Our updated outlook primarily reflects different scenarios for how Canadian macroeconomic trends play out over the balance of the year. Elevated household debt levels and rising mortgage and rent costs are likely to continue to weigh on consumer spending in the immediate future.
Speaker Change: Capital expenditures are still planned in the range of $105 million to $115 million.
Speaker Change: Our updated outlook primarily reflects different scenarios for how Canadian macroeconomic trends play out over the balance of the year.
Speaker Change: Elevated household debt levels and rising mortgage and rent costs are likely to continue to weigh on consumer spending in the immediate future.
Michael Mar: At the same time, inflation is falling, and the Bank of Canada has recently begun reducing its benchmark interest rate, both of which should eventually help ease pressure on consumers. At the midpoint of our range, we're assuming no material change in macroeconomic conditions in either Canada or the U.S. The low end of the range assumes further deterioration in the Canadian economy and further reductions in consumer spending in our category, as well as slightly softer U.S. sales trends.
Speaker Change: At the same time, inflation is falling, and the Bank of Canada has recently begun reducing its benchmark interest rate, both of which should eventually help ease pressure on consumers.
Speaker Change: As the midpoint of our range, we're assuming no material change in macroeconomic conditions in either Canada or the US.
Speaker Change: The low end of the range assumes additional deterioration in the Canadian economy and further reductions in consumer spending in our categories.
Michael Mar: The high end of the range reflects modest improvements in the Canadian economy beginning in the fourth quarter and slightly better U.S. sales. We expect comparable source sales trends to be slightly better in the fourth quarter than in the third quarter for a couple of reasons. First, the previously mentioned Canada Day holiday shift will negatively impact Canadian comparable store sales by approximately 100 basis points in the third quarter, offsetting the corresponding benefit we saw in the second quarter.
Speaker Change: as well as slightly softer U.S. sales trends.
Speaker Change: The high end of the range reflects modest improvements in the Canadian economy beginning in the fourth quarter and slightly better U.S. sales trends.
Speaker Change: We expect comparable source sales trends to be slightly better in the fourth quarter than the third quarter for a couple of reasons.
Speaker Change: First, the previously mentioned Canada Day holiday shift will negatively impact Canadian comparable store sales by approximately 100 basis points in the third quarter, offsetting the corresponding benefit we saw in the second quarter.
Michael Mar: Second, our prior year comparisons get progressively easier as we move through the second half. Given these dynamics and the timing of new store openings, we expect total net sales dollars to be approximately the same in the third and fourth quarters. We also expect adjusted EBITDA margins to decline by a similar amount versus last year in both the third and fourth quarters, primarily reflecting gross profit margin compression related to investments in new store growth and off-site processing, as well as the leverage on lower sales in Canada, partially offset by continued efficiency gains in our central processing, and just a few final details.
Speaker Change: Second, our prior year comparisons get progressively easier as we move through the second half.
Speaker Change: Given these dynamics and the timing of new store openings, we expect total net sales dollars to be approximately the same in the third and fourth quarters.
Speaker Change: We also expect adjusted EBITDA margins will decline by a similar amount versus last year in both the third and fourth quarters. Primarily reflecting gross profit margin compression related to investments in new store growth and off-site processing.
Speaker Change: as well as G-Leverage on lower sales in Canada.
Speaker Change: partially offset by continued efficiency gains in our central processing centers.
Michael Mar: Our outlook for net income assumes an effective tax rate of approximately 34%, and based on our share of purchase activity to date, we are now projecting weighted average deluded shares outstanding to be approximately 168 million for the full year. This does not contemplate any potential future share repurchase.
Speaker Change: And just a few final details. Our outlook for net income assumes an effective tax rate of approximately 34%.
Speaker Change: And based on our share repurchase activity to date, we are now projecting weighted average diluted shares outstanding to be approximately $168 million for the full year. This does not contemplate any potential future share repurchases.
Operator: This concludes our prepared remarks. We would now like to open the call for questions. Operator?
Speaker Change: This concludes our prepared remarks. We would now like to open the call for questions. Operator?
Operator: Thank you very much. We will now conduct a question and answer session. Should you have a question, please press the star, followed by the number on your touch-tone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star, followed by the two. If you are using a speaker phone, please lift the handset before pressing any keys. One moment, please for your first question. The first question comes from Randy Konik with Jeffries. Please go ahead.
Speaker Change: Thank you very much. We will now conduct the question and answer session. Should you have a question, please press the star followed by the one on your touchtone phone. You will hear a prompt that your hand has been raised. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment please for your first question.
Randal Konik: Yeah, thanks a lot, and good evening, everyone. I guess first, Mark or Michael, maybe give us some perspective on, you know, it sounds like you're doing very fine and stable and good in the U.S. market, so maybe go deeper on that, kind of, on those stores first. Give us some perspective on the ramp you're seeing, some changes in the cohorts of more recent cohorts versus prior and what we can expect ahead in the U.S. store geography first.
Speaker Change: First question comes from Randy Konik with Jefferies. Please go ahead.
Randy Konik: So yeah, thanks a lot and a good evening everyone. I guess first.
Randy Konik: Mark or Michael, maybe give us some perspective on, you know, it sounds like you're doing very fine and stable and good in the U.S. market, so maybe go deeper on that, kind of on that, on those stores first, you know, give us some perspective on
Randy Konik: the ramp you're seeing, some changes in the cohorts of more recent cohorts versus prior, and what we can expect ahead on the U.S. store geography first. Thanks, guys.
Mark Walsh: Thanks, Randy. You know, I think Jubran's probably best suited to answer that. He's here in the room. Jubran, why don't you give a perspective on U.S. new store growth, and I can maybe fill in some things on demographics. Yeah, sounds good. Hey, Randy.
Jubran Tanious: Thanks, Randy. I think Jubran's probably best suited to answer that. He's here in the room. Jubran, why don't you give a perspective on US new store growth and I can maybe fill in some things on demographics. Yeah, sounds good. Hey, Randy.
Jubran Tanious: Well, as the guys talked about earlier, U.S. new stores are really strong out of the gate. I mean, as a group, when you take all of our new stores together. They're exceeding our expectations, both on the top and bottom lines. But yeah, U.S. new stores are especially strong, which is very encouraging. For our long-term growth plans, because, as Michael talked about, it is the US where we have the greatest opportunity for a new short girl. Canada stores, performing very close to expectations, admittedly a little hard to separate on the macro impact. Back to the U.S.
Jubran Tanious: Well, as the guys talked about earlier, U.S. new stores are really strong out of the gate. I mean, as a group, when you take all of our new stores together...
Speaker Change: They're exceeding our expectations, both top and bottom line. But yeah, U.S. new stores are especially strong, which is very encouraging.
Jubran Tanious: for our long-term growth plans, because as Michael talked about, it is the U.S. where we have greatest opportunity for new short growth. Canada stores performing very close to expectations, admittedly a little hard to separate on a macro impact, but
Jubran Tanious: I think one of the things that we were most excited about is the reliability of our forecasting and the accuracy of our modeling. What I mean by that is... You know, we've always felt good about our approval process and our pipeline and our modeling for new stores. But as we sit today, we now have enough stores opened over the last 18 months, 24 months to have actual empirical data. compare to what our models for cast.
Michael Marr: Back to the U.S., I think one of the things that we're most excited about is that it's the reliability of our forecasting and the accuracy of our modeling. What I mean by that is...
Michael Marr: We've always felt good about our approval process and our pipeline and our modeling for new stores.
Michael Marr: But as we said today, we now have enough stores opened over the last 18 months, 24 months to have actual empirical data to compare to what our models forecasted.
Jubran Tanious: Obviously, very important as we think about what is shaping up to be a very robust pipeline of new stores for us and on having the confidence to do so. Place, what could be some very attractive pieces of real estate for us as we look forward, so all and all, very pleased with the U.S. On a demographic basis, Randy, just a couple of quick highlights of, you know, we're super excited about the continued growth of our loyalty program in North America, up double digits, and the US specifically in terms of some demographic trends.
Michael Marr: Obviously, very important as we think about what is shaping up to be a very robust pipeline of new stores for us, and us having the confidence too.
Michael Marr: place what could be some very attractive pieces of real estate for us as we look forward. So all in all, very pleased with the U.S. new stores.
Michael Marr: On a demographic basis, Randy, just a couple of quick highlights. We're super excited about the continued growth of our loyalty program in North America, up double digits. In the U.S. specifically, in terms of some demographic trends.
Jubran Tanious: What's exciting, and we've talked about this before, both members, non-members, and our new members are all skewing younger, and we have seen the household income of our membership raised a little, rise a little in that 100,000 plus cohort. So a lot of good trends there, and we're really excited about the continued momentum we're seeing in the U.S. market.
Randy Konik: What's exciting, and we've talked about this before, both members, non-members, and our new members are all skewing younger, and we have seen the household income of our membership
Randy Konik: rise a little in that 100,000 plus cohort. So a lot of good trends there, really excited about the continued momentum we're seeing in the US market.
Randal Konik: Great, thanks. My last question is, obviously, I want to kind of get some more perspective on Canadian difficulties. Do you think, when you think about the guidance and you think about current trends, you think you've kind of captured enough of the potential downside in that market? And, you know, have you seen this movie before?
Randy Konik: [inaudible]
Michael Marr: Great, thanks. My last question is, obviously, I want to kind of get some more perspective on.
Speaker Change: Canadian Difficulty
Speaker Change: Do you when you think about the guidance and you think about current trends, do you think you've kind of captured enough of the
Speaker Change: you know potential downside in that market and and you know have you seen this movie before you know can you when you look back to historical financials and think through you know the last time this kind of got difficult or challenged at all in the Canadian market what happened then versus now would be super helpful to get get some perspective on you know kind of when we bottom or if we're getting close to the bottom in that uh in that market thanks guys
Michael Mar: You know, can you look back to historical financials and think through, you know, the last time this kind of got difficult or challenged at all in the Canadian market? What happened then versus now would be super helpful to get some perspective on, you know, kind of when we bottom or if we're getting close to the bottom in that market. Thanks, guys. Sure. Sure, Randy.
Michael Mar: You know, I think this particular downturn is unique. Mark outlined a number of the factors that are pressuring the Canadian consumer right now. And, you know, we see it in the macro data, we see it in the national retail statistics, and we see it in our business. And so it's hard to say with any precision just where that goes in the very near term. We are confident that this is a cyclical moment, and we believe that, like all cycles, it will end.
Speaker Change: Sure, Randy. Thanks for the question. This is Michael.
Speaker Change: You know, I think this particular downturn is is unique it Mark outlined a number of the factors that are pressuring the Canadian consumer right now and You know, we see it in the macro data. We see it in the national retail statistics and we see it in our business
Speaker Change: And so it's hard to say with any precision just where that goes in the very near term. We are confident that it is a cyclical moment. We believe that like all cycles it will end. But we're not economists and we're not trying to prognosticate when exactly that will be.
Michael Mar: But we're not economists, and we're not trying to prognosticate when exactly that will be. So I do think, in response to your original question, the way we've constructed our guidance and the range that we've put around it is intended to capture the reasonably plausible outcomes over the next six. On the one hand, you know, the household debt service pressures and cumulative inflationary pressures are not going to go away overnight. Those will continue to be pressure points on our consumers.
Speaker Change: So, I do think, to your original question, the way we've constructed our guidance and the range that we've put around it is intended to capture the reasonably plausible outcomes over the next six months.
Speaker Change: On the one hand, you know, the household debt service pressures and cumulative inflationary pressures are not going to go away overnight. Those will continue to be pressure points on our consumer.
Michael Mar: On the other hand, inflation is coming down, the central bank hat has begun easing, and we have seen outside projections that suggest that there could be improvement as soon as the fourth quarter. And so the range that we've established, we think captures those two possibilities, and that potential turn in either direction is really what drives the width of the range as we sit here today. The U.S. has been remarkably stable. It continues since the end of the quarter to run a consistent increase, not materially different from the way we exited the quarter. And so we really see the variability right now in the near term in Canada.
Speaker Change: On the other hand, inflation is coming down, the central bank has begun easing, and we have seen outside projections that suggest that there could be improvement as soon as the fourth quarter. And so, the range that we've established, we think
Speaker Change: captures those two possibilities and that
Speaker Change: potential turn in either direction is really what drives the width of the range as we sit here today. The U.S. has been remarkably stable.
Speaker Change: It continues since the end of the quarter to run a comp store increase, not materially different from the way we exited the quarter, and so we really see the variability right now in the near term in Canada.
Randal Konik: Very helpful. Thanks, guys.
Speaker Change: Very helpful. Thanks, guys.
Speaker Change: Your next question comes from Brooke Roach with Goldman Sachs. Please go ahead.
Brooke Roach: Good afternoon, and thank you for taking our question. I was hoping you could elaborate on your ability to protect margins against a tougher Canadian macro environment where a greater proportion of total business revenue growth is coming from new stores rather than like-for-like increases in the base business. Can you potentially quantify the gross profit pressure that you saw between the new stores and processing relative to the deleverage that you saw on fixed costs? And help us walk through the puts and takes of how you're thinking about margin protection going forward?
Brooke Roach: Good afternoon and thank you for taking our question. I was hoping you could elaborate on your ability to protect margins against a tougher Canadian macro environment where a greater proportion of total business revenue growth is coming from new stores rather than like-for-like increases in the base business.
Speaker Change: Can you potentially quantify the growth-profit pressure that you saw between the new stores and processing relative to the delivered that you saw on fixed costs and help us walk through the puts and takes of how you're thinking about margin protection going forward.
Jubran Tanious: Many, maybe, Hi Brooke, this is Gibran. Maybe I'll just give a little color to the nature of your question, and then Michael can jump in with the rest. That's absolutely right. That is a unique feature of our business where we can modulate processing levels, which bring with them material costs and, more importantly, labor costs, to match what we're seeing on the demand side in the customer flow side. So, as we've talked about... over the quarters,
Speaker Change: Maybe, maybe, hi Brooke, this is Jubran.
Jubran Tanious: Maybe I'll just give a little color to the nature of your question, and then Michael can jump in with the rest.
Michael Marr: That is that's absolutely right. That is a unique feature of our business where we can modulate processing levels which bring with it material costs and more importantly labor costs.
Michael Marr: to match what we're seeing on the demand side and the customer flow side. So as we've talked about over the quarters, we closely manage that, we've managed production labor and our stores and response to demand, and it is a balance between preserving.
Jubran Tanious: We closely manage that. We manage production labor in our stores in response to demand. And it is a balance between preserving profitability but also ensuring a steady flow of fresh product to the customer so that, on a per customer basis, we're maintaining the sort of selection and value promise. But there are limitations to that. Unfortunately, the softness that we're seeing in Canada, which is very unique, as Michael has said, is honestly beyond the normal range of what we can leverage with processing labor. So we can protect it. But with what we're seeing macro, it does lead to some deleverage during the quarter, but we monitor it store by store, week by week, very closely.
Speaker Change: profitability but also ensuring steady flow of fresh product to the customer so that on a per customer basis we're maintaining the sort of selection and value promise.
Michael Marr: There are limitations to that. Unfortunately, the softness that we're seeing in Canada, which is very unique, as Michael has said, is
Michael Marr: is honestly beyond the normal range of what we can leverage with processing labor, so we can protect.
Mark Row: But with what we're seeing Mark Row, it does lead to some deliverage during the quarter. But we monitor it, store by store, we fight weak very closely.
Michael Mar: Yeah, Brooke, this is Michael. And I would just add to that, first off, that even in a difficult macro environment in Canada, in a quarter that wasn't up to our original expectations, we still were able to clear a 20% EBITDA margin, which I really think is a testament to the durability of the resiliency of this financial model. As we think about the various puts and takes and what the drivers were, so let's just start with the second quarter.
Michael Marr: Yeah, Brooke, this is Michael, and I would just add to that, first off, that even in a difficult macro environment in Canada, in a quarter that wasn't up to our original expectations, we still were able to clear a 20% EBITDA margin, which I really think is a testament to the durability, the resiliency of this financial model.
Michael Marr: As we think about the various puts and takes and what the drivers were, so let's just start with the second quarter. The biggest driver in the deleverage in the second quarter from last year were deliberate investments that we've made, number one, in new stores, and secondly, in off-site processing.
Michael Marr: To a lesser extent, the third factor was the decline in Canadian sales and some de-leveraged pressure as Jubran just said. So to take each of those in turn and talk about how we think about them going forward.
Michael Mar: As I think you know, new stores open roughly half of our ultimate expectation for mature sales, and they grow rapidly from there. So, as we're here now beginning, you know, early in our new store growth cycle, we are expecting some pressure from that. And that will ramp as we get into the back half of this year because our new store growth starts to accelerate here in the third and fourth quarter. Offsite processing, the other big investment, it does have its cost.
Speaker Change: As I think you know, new stores open roughly half of our ultimate expectation for mature sales, and they grow rapidly from there.
Michael Marr: So, as we're here now beginning, you know, early in our new store growth cycle, we are expecting some pressure from that, and that will ramp as we get into the back half of this year, because our new store growth starts to accelerate here in the 3rd and 4th quarters.
Michael Marr: Offsite processing, the other big investment, it does have added costs. There's additional freight, there are overhead costs. And so when we open a new offsite processing facility, especially a large one like a CPC,
Michael Mar: There's additional freight, there are overhead costs, and so when we open a new Offsite Processing Facility, especially a large one like a CPC, that just creates the natural de-leverage initially. The good news is that as we get better and as we push volume through these CPCs, as we improve processing efficiencies, we're starting to see those costs per unit come down. And so, you know, we mentioned the Edmonton example, our most mature central processing center, now near parity with processing on site.
Speaker Change: That just creates the natural, the leverage initially.
Michael Marr: The good news is that as we get better, and as we push volume through these CPCs, as we improve processing efficiencies,
Speaker Change: We're starting to see those costs per unit come down.
Speaker Change: And so, you know, we mentioned the Edmonton example, our most mature sort of processing center, now in your parody with processing on site. And so, that's a big opportunity. It was a tailwind that helped to mitigate the headwinds and gross margin in the second quarter. We think it will continue to do that.
Michael Mar: And so that's a big opportunity. It was a tailwind that helped to mitigate the headwinds and gross margin in the second quarter. We think it will continue to do that. And over time, in this model, as we get to a balance with our growth investments beginning to mature, we would expect that balance to start to tilt more in our favor, and we should be able to continue to sustain those long-run EBITDA margins near 20%.
Speaker Change: and over time, longer term in this model, as we get to a balance with our gross investments beginning to mature. We would expect that balance to start to tilt more in our favor, and we should be able to continue to sustain those long-ready, but don margins near 20%.
Michael Mar: Great, thanks. And then just one quick follow-up. Can you speak to your outlook for AUR and pricing in your U.S. business? What was your AUR in the U.S. business this quarter, and are you seeing any additional signs of price sensitivity in your core customer?
Speaker Change: Great. Thanks. And then just one quick follow-up. Can you speak to your outlook for AUR and pricing in your U.S. business? What was AUR in the U.S. business this quarter, and are you seeing any additional signs of price sensitivity in your core customer?
Michael Mar: I can speak to this quarter. So transactions in the basket were both flat. And so, you know, we don't we don't really get into more granular funnel metrics than that. But, in the US, it was low single-digit increases in both, and Canada was low single-digit decreases in both. We really don't break our guidance into any more granularity than that.
Speaker Change: I could speak to this quarter, so transactions and baskets were both flat and so, you know, we don't, we don't really get into more granular funnel metrics than that.
Michael Mar: Sure, Randy, thanks for the question. This is Michael.
Speaker Change: In the U.S. it was low single digits increases in both, and Canada was low single digit decreases in both.
Speaker Change: We really don't, we don't break our guidance into any more granularity than that though.
Brooke Roach: Great. Thanks so much. I'll pass it on.
Operator: Here the next question comes from Matthew Boss with JP Morgan.
Speaker Change: Great. Thanks so much. I'll pass it on.
Matthew Boss: Great, thanks. So Mark, with the softer economic backdrop that you cited in Canada, is it the maturity of the thrift market there, or any changes in competition that you think are constraining customer trade down in that market? Maybe what have you seen from Canada in July, and just any actions or company-specific initiatives that you're taking to improve traffic in the back half of the year?
Speaker Change: Here next question comes from Matthew Loth with JP Morgan.
Matthew Loth: Great, thanks. So, Mark, with the softer economic backdrop that you cited in Canada,
Speaker Change: um
Matthew Loth: So is it the maturity of the thrift market there, or any changes in competition?
Speaker Change: that you think are constraining customer trade-down in that market. Maybe what have you seen from Canada in July? And just any actions or company-specific initiatives that you're taking to improve traffic in the back half of the year.
Mark Walsh: Yeah, so we, Matt, good question. We conducted a pretty significant survey of Canadian consumers, and what we are seeing is thrift shoppers are experiencing more financial stress, and the general population. While we see some modest trade-down from consumers reducing spend at non-discount retailers, unfortunately, this is more than offset by weakness in the lower income cohorts. There tend to be a higher percentage of our core customer base, and so I would describe it as their really side.
Speaker Change: Yeah, so we, Matt, good question, we conducted a pretty significant survey of Canadian consumers and what we are seeing are thrift shoppers are experiencing more financial stress.
Speaker Change: the General Population.
Speaker Change: While we see some modest trade-down from consumers reducing spend at non-discount retailers, unfortunately, this is more than offset by weakness in the lower income cohorts, which
Speaker Change: There tend to be a higher percentage of our work customer base.
Mark Walsh: As their pressure, their financial pressure has increased, they have retreated to the sidelines. The good news is that, in that same survey, they feel like once their disposable income returns to levels that they're more comfortable with, they will return once that improvement happens. Look, we're already very well penetrated in Canada, and thrift is widely adopted. I think the core data that we're seeing from the Canadian government's retail sector indicate that we're holding our own from a competitive standpoint.
Speaker Change: That's why I would describe it as their really side lives.
Speaker Change: As their pressure, their financial pressure has increased their sidelines. The good news is that in that same survey, they feel like once they're disposable income returns to levels that they're more comfortable with.
Speaker Change: They will return once that once that improvement happens
Speaker Change: Look, we're already very well penetrated in Canada and Thrift is widely adopted. I think the core data that we're seeing from the Canadian government's retail sector indicate that we're holding our own from a competitive standpoint.
Mark Walsh: We're doing a lot to try to generate additional traffic through targeted promotions. The engagement metrics that we see from those efforts have been best in class. You know, I'd point to that double-digit increase in member growth, and the retention levels there are still very, very high, but we're gonna continue to test tactics to drive traffic and conversion. We won't do it where it's positive, where it's negative ROI. So as we've tested these, these approaches. We're very mindful of spending good money after bad, or bad money after bad, so hopefully, that answers your multi-faceted question. Yes.
Speaker Change: We're doing a lot to try to generate additional traffic through targeted promotions. The engagement metrics that we see in those efforts have been best in class.
Speaker Change: Now, I'd point to that double digit increase in member growth, and retention levels there are still very, very high. But we're going to continue to test tactics to drive traffic, to version, but...
Speaker Change: We won't do it where it's positive, where it's negative ROI. So as we we've tested these these approaches
Speaker Change: We're very mindful of spending good money after bad, or bad money after good, everyone think about it.
Speaker Change: So hopefully that answers your multifaceted question.
Matthew Boss: Yep. And then maybe just to follow up from Michael, on gross margin, could you just walk through the puts and takes to consider for gross margins in the third versus fourth quarter? And just what is the timeline for CPCs to reach maturity and cost per unit parity, as you outlined?
Speaker Change: Yep, and then maybe just to follow up from Michael, on gross margin, could you just walk through the puts and takes to consider for gross margins in the third versus fourth quarter?
Speaker Change: And just what is the timeline for CPCs to reach maturity and cost per unit parity as you outlined?
Michael Mar: Here I am, so as far as margin in the second half of the year, let's just go ahead and, for simplicity, use the midpoint of the guidance range, and you can flex up or down from there as you see fit. But overall, at the midpoint, we're looking at a similar margin in the second half to what we had in the first half.
Speaker Change: Sure Matt, so as far as margin in the second half of the year, let's just go ahead and for simplicity use the midpoint of the guidance range and you can flex up or down from there as you see fit, but overall at the midpoint we're looking at a similar margin in the second half.
Michael Mar: And what that implies is more compression versus last year, which is a reflection of new store growth accelerating in the back half of the year and that being a bigger head. The guidance endpoints from there, the variation from there, would just be the varying degrees of sales leverage or deleverage off that midpoint, primarily in Canada, as I said. We do think that the continued improvement in offsite processing costs will help mitigate that margin pressure and continue to do so going forward.
Speaker Change: To what we had in the first half, and what that implies is more compression versus last year, which is a reflection of new store growth accelerating in the back half of the year, and that being a bigger headwind.
Speaker Change: The guidance endpoints from there, the variation from there, would just be the varying degrees of sales leverage or deleverage off that midpoint, primarily in Canada, as I said.
Speaker Change: We do think that the continued improvement in off-site processing costs.
Michael Mar: As far as how the quarter split up, Matt, I think what I'd point you to is the comments I made about how adjusted EBITDA margin will play out over the third and fourth quarters. And really, that's almost entirely driven by dynamics and gross margin. So essentially, we think that EBITDA margin compression relative to last year will be similar in both the third and fourth quarters, almost all of which is again driven by gross profit margin compression as well. And again, it's a reflection of the accelerated new store openings beginning in the third quarter.
Speaker Change: Will help mitigate that margin pressure and continue to do that going forward as far as how the quarter split up mad. I think what I'd point you to is
Speaker Change: The comments I made about how adjusted EBITDA margin will play out over the third and fourth quarter and really that's almost entirely driven by dynamics and gross margin. So, essentially, we think that.
Speaker Change: EBITDA margin compression relative to last year will be similar in both the third and fourth quarters, almost all of which, again, is driven by gross profit margin compression as well. And again, it's a reflection of the
Jubran Tanious: Yeah, Matt, can I ask Jubran to jump in because I think this powerful trend and what we've achieved in Edmonton on a cost per unit basis is just the beginning, and I think there are some real positive signs in our other CPCs about moving in that direction. I think it's a big unlock for our growth moving forward. Yeah, yeah, it is, Matt.
Speaker Change: accelerated new store openings beginning in the third quarter. Yeah Matt, can I ask Jubran to jump in because I think the the powerful trend and what we've achieved in Edmonton
Jubran Tanious: on a cork, cost per unit basis is just the beginning and I think there are some real positive signs in our other CPCs about moving in that direction. I think it's a big unlock for our growth moving forward. Yeah, yeah, it is matched, brought here. So, you know, we're citing Edmonton only because that was CPC number one.
Jubran Tanious: Yeah, yeah, it is a match for on here. So, you know, we're citing Edmonton only because that was CPC number one. One of the nice benefits of our learning curve here is that you get two efficiencies faster and subsequent CPCs. So I'll give you an example.
Speaker Change: But one of the nice benefits of our learning curve here is that you get two efficiencies faster.
Jubran Tanious: Our location in Hyattsville, Maryland, which some of you are actually familiar with and may have had a tour of. That facility has been open for a year and a half, and is operating at unit cost parity, it's not even a touch better than Edmond, in a far shorter timeframe. So as we think about the five CPCs we have now, we have a sixth planned for Southern California, which will open early next
Speaker Change: and subsequent CPCs. So I'll give you an example. Our location in Hyattsville, Maryland, which some of you are actually familiar with and may have had a tour in.
Speaker Change: That facility has been open a year and a half, and is operating at a unit cost parity.
Speaker Change: if not even a touch better than Edmonton in a far shorter time frame. So as we think about
Speaker Change: The five CPCs we have now, we have a six planned for Southern California, which will open early next year. The maturity curve on these things has really come down to a point where you get to parody as Michael talked about.
Jubran Tanious: The maturity curve on these things has really come down to a point where you get to parity, as Michael talked about, in terms of cost per item, equivalent to what a traditional store would do for itself. And that obviously has massive implications for us, as Mark talked about, for new store growth.
Speaker Change: in terms of cost for item equivalent to what a traditional store would do for itself. And that obviously has massive implications for us like Mark talked about from the store growth.
Matthew Boss: Great. Best of luck.
Speaker Change: Great. Best of luck.
Speaker Change: Thanks very much. Once again, if you'd like to ask a question, please press star, the number one on your touch tone phone. Your next question comes from Peter Keith with Piper Sander.
Peter Keith: Hey, thanks. Good afternoon, guys.
Peter Keith: I was unclear on the guidance reduction. It looks like both sales and EBITDA were taken down by $35 million at the midpoint. So I understand the sales to you leverage dynamic, but can you help us understand that margin flow through and why the EBITDA comes down so much?
Peter Keith: Hey, thanks. Good afternoon, guys. It was unclear on the guidance reduction. It looks like both sales and EBITDA were taken down by $35 million at the midpoint. So I understand the sales-to-leverage dynamic, but can you help us understand that margin flow-through and why the EBITDA comes down so much?
Operator: Thanks for your next question, which comes from Brooke Roach with Goldman Sachs. Please go ahead.
Michael Mar: Yeah, this is Michael. So, you know, we talked about what's behind the reduction in sales. We do have some mitigation reflected in there in terms of managing labor to match that. However, as Gibran mentioned earlier, we're not able to completely offset that at a certain point. We've got to have a minimum amount of labor to just ensure a continued flow of new product onto the floor. The rest, honestly, the rest of the changes are pretty immaterial, very small items and expenses put in takes, and it really comes down to a reduction in candidate sales.
Speaker Change: Yeah, this is Michael. So, you know, we talked about the what's what's behind the reduction in the sales. We do have some.
Speaker Change: Mitigation reflected in there in terms of managing labor to match that, as Jubran mentioned earlier, we're not able to completely offset that at a certain point. We've got to have a minimum amount of labor too.
Peter Keith: Just ensure a continued flow of new product onto the floor, the rest honestly, the rest of the changes are pretty immaterial, very small items and expense puts in takes and it really comes down to the reduction in Canada sales.
Speaker Change: Is the CPC margin headwind and new store margin headwind a little bit greater than you expected?
Peter Keith: No, No, we had contemplated that before. I think just as you bring down sales to a certain point, the deleverage pressure, which was the other element of our gross margin headwind in the second quarter, just starts to become a greater factor.
Speaker Change: No, we had contemplated that before, I think, just as you bring down sales to a certain point, the leverage pressure, which was the other elements of our gross margin, headwind in the second quarter, just starts to become a greater factor.
Peter Keith: All right, and then for Mark or Gibran, one theory going around out there is regarding your pricing analytics, and we know you have very good analytics so in sales are strong, you can take up prices by store by category, but the theory out there is that the analytics don't tell you to take prices down, and so is that correct, and could you be in a situation where in Canada, you have taken up the price and maybe things are weak because you've developed price, some of the competition.
Speaker Change: Okay, all right.
Speaker Change: And then, for Mark or Jubran, one theory going around out there just is regarding your pricing analytics.
Speaker Change: We know you have very good analytics, so when sales are strong, you can take up prices by store, by category.
Speaker Change: But the theory out there is that the analytics don't tell you to take prices down. And so is that correct and could you be in a situation where in Canada you have taken up the price and maybe things are weak because you've developed price some of the competition?
Mark Walsh: We're always We're always engaged in understanding our price-value relationship. It is something that the field operations team puts a lot of energy into, so we're monitoring that closely. We don't feel like we've been skewed from that particular dynamic. If we do, we'll make adjustments for sure.
Speaker Change: We are always engaged in understanding our price-value relationship.
Speaker Change: It is something that the field operations team puts a lot of energy into so we're monitoring that closely. We don't feel like we've
Speaker Change: are askew from that particular dynamic. If we do, we'll make adjustments for sure. But we're looking at competitive.
Jubran Tanious: But we're looking at competitive data all the time. We compare shopping malls in terms of competition to make sure that we are in line. I know personally, I've been in 50 odd stores in the last three months, and our price-value relationship remains strong, and at $5 USD, it's still a pretty powerful value proposition.
Speaker Change: Data all the time, we're cross shopping stores in terms of competition and make sure that we are in line. I know personally, I've been in...
Speaker Change: 50 odd stores in the last three months, and our price value relationship remains strong and at $5 USD, it's still a pretty powerful value proposition.
Peter Keith: Yeah, and Peter, this is Jubran. The only thing that I would add is to double down on what Mark mentioned earlier, that, you know, we're not sitting still. All the analytics, all of the competitive intelligence that Mark just talked about is valid. We're also tinkering and testing, testing learn on some more aggressive pricing and discount approaches and select stores to see if there's something that we can hit upon that will mitigate the macro that we're seeing. So I think it's a blend of things, and I think we'll continue to learn.
Speaker Change: Yeah and Peter, this is Jubran, the only thing that I would add is...
Peter Keith: It doubled down on what Mark mentioned earlier, that, you know, we're not sitting still. All the analytics, all of the competitive intel that Mark just talked about is valid.
Peter Keith: But we're also tinkering and testing, test and learn on some more aggressive pricing and discount approaches and select stores to see if there's something that we can hit upon. That will have mitigate the macro that we're seeing. So I think it's a blend of things and I think we'll continue to learn.
Peter Keith: Very good. Thanks so much.
Operator: Your next question comes from Michael Lasser with UBS. Please go ahead. Good evening. Thank you.
Speaker Change: Very good. Thanks so much.
Michael Lasser: Dreaming, thank you so much for taking my question outside of the relative maturity of each market. What is different about Canada and your stores there that would make it not a leading indicator for what might happen in the US if macroeconomic conditions decline in this country?
Speaker Change: Your next question comes from Michael Lasser with UBS. Please go ahead.
Michael Lasser: Three main thank you so much for taking my question outside of the relative maturity of each market.
Michael Lasser: What is different about Canada and your stores there that would make it not a leading indicator for what might happen in the U.S. if macroeconomic conditions decline in this country?
Mark Walsh: Well, look, I think part of it is you have to start with the macroeconomic environment. It is a very different Canada right now. The US has much lower unemployment and certainly much lower household debt. Thrift is in a much earlier stage of maturity, and there's a lot of secular growth available. You know, on the flip side of that, Canada's for us, 95% brand awareness, penetration, our estimate in one of three households. It's just a very, they're apples and oranges, Michael.
Speaker Change: Well, look, I think part of it is you have to start with the macroeconomic environment is very different in Canada right now. U.S. has much lower unemployment and certainly much lower household debt. Thrift is in a much earlier stage of maturity, and there's a lot of secular growth available.
Michael Lasser: You know, on the flip side of that, Canada's, for us, 95% brand awareness, penetration, our estimate, in one of three households.
Mark Walsh: And I do think what we're seeing in the data that we've gotten over the last three months really indicates that. That core, you know, a good portion of our core customer is under significant financial pressure, and the discretionary choices they're making are really sidelining them from coming into our environment. But I will point to the fact that we grew our database, our loyalty program, double-digits, even in the face of that.
Michael Lasser: It's just a very...they're apples and oranges, Michael. And I do think what we're seeing in the data that we've...
Speaker Change: We've got it over the last three months.
Michael Lasser: really indicates that
Michael Lasser: That core, you know, a good portion of our core customer is under significant financial pressure. And the discretionary choices they're making are really sidelining them from
Michael Lasser: coming into our environment.
Michael Lasser: But I will point to the fact that we grew our database, our loyalty program, double digits.
Mark Walsh: So I think there's still a lot of momentum in both countries. We're just going to continue to monitor that situation and operate the business in a way that gives us a firm footing coming out of that negative macro cycle.
Michael Lasser: even in face of that. So I think there's still a lot of momentum in both countries. We're, we're just going to continue to monitor that situation and operate the business in a way that
Michael Lasser: gives us firm footing coming out of that negative macro cycle.
Speaker Change: Catch you.
Mark: Mark, my follow up question is, and either you or Michael or Jubran can comment on this, it's been about a year since...
Mark: The IPO and the business has been a little bit more challenged than what you had anticipated coming out of the gate. So, A, outside of the macro, is there anything that you would attribute that more challenging?
Speaker Change: management ability to drive the business to? And B, what do you think the new or updated algorithm for the business in terms of new stores, comp growth, margins as we look to 2025 and beyond?
Mark Walsh: Yeah, so I'll start. I'll start, and I think Michael will jump in. You know, when we set the table for the IPO, I look back a year from a year ago and say while our US business has been right where we said it was going to be, Australia has performed better than we had hoped. We've opened up our offsite production facilities in an efficient manner, and they're now performing at a level that we didn't even anticipate.
Speaker Change: Yeah so I'll start I'll start and I think Michael will jump in. You know when we set the table for the IPO
Speaker Change: I look back from a year ago and say, while our U.S. business has been right where we said it was going to be, Australia has performed better than we had hoped. We've opened up our off-site production facilities.
Michael: in an efficient manner, and they're now performing at a level that we didn't even anticipate. They're even better than we had hoped.
Mark Walsh: They're even better than we had hoped. The new store, I think the new store piece of the equation was always the biggest challenge. Right on target, they're delivering sales and EBITDA in line with our expectations. But I don't think we could have ever foreseen what has happened in Canada. So, therefore, I would score the organization pretty highly on executing what we articulated we would do going into that IPO. I think we're managing through, hopefully, a generational issue in Canada, and we'll come out on the other side, as we did with the pandemic, in a good place and stronger than when we started. And Michael, you want to touch on that? Yeah, Michael, let me.
Mark Walsh: The new store, I think the new store piece of the equation was always the biggest challenge.
Michael: Right on target, they're delivering sales and EBITDA in line with our expectations.
Michael: I don't think we could have ever foreseen what has happened in Canada, so therefore I would score...
Michael: The organization, pretty highly on executing what we articulated, we would execute going into an IPO. I think we're managing through...
Michael: hopefully a generational issue in Canada.
Michael: and we'll come out the other side as we did with the pandemic.
Michael: in a good place and stronger than when we when we started. And Michael, you want to touch on that? Yeah. Yeah, Michael, let me speak to your question about the long term growth algorithm. So, you know, I want to be clear. First of all, I'm not specifically speaking to twenty twenty five. We'll obviously have more to say about that in a while. But,
Michael Mar: First of all, I'm not specifically speaking about 2025. We'll obviously have more to say about that in a while. But as we look at the long-term model, we continue to see high single-digit annual revenue growth, and it will be driven primarily by new stores. And our recent track record on new stores and the pipeline that we have in front of us gives us a lot of confidence that that will be our long-term growth driver.
Michael Mar: Yeah, Michael, let me speak to your question about the long-term growth algorithm. So, you know, I want to be clear.
Michael Mar: As we look at the long-term model, we continue to see high single-digit annual revenue growth.
Michael Mar: and it will be driven primarily by new stores and our
Michael Mar: Recent track record on new stores and the pipeline that we have in front of us gives us a lot of confidence that that will be our long-term growth driver. We think cops, we will plan on probably something in the low single digit range for cops.
Michael Mar: We think comps, we'll probably plan on something in the low single-digit range for comps, with the U.S. higher than Canada, as Mark just mentioned Canada is a more mature business for us. Thrift is a more mature sector, and so all of that adds up to the U.S. being the growth driver. We have a lot of runway there. A lot of our new stores will be placed there. And as those stores become comp stores, they should result in accelerating comp store growth in the U.S. or at least elevated comp store growth relative to Canada.
Michael Mar: with the U.S. higher than Canada. Mark just mentioned Canada is a more mature business for us. Thrift is a more mature sector.
Michael Mar: And so all of that adds up to the U.S. being the growth driver, we have a lot of runway there, we have a lot of our new stores.
Michael Mar: will be placed there and as those stores become comp stores, they should result in accelerating comp store growth in the U.S. or at least elevated comp store growth relative to Canada.
Michael Mar: I think as far as profitability is concerned, we should be able to continue to support Eva Domargen's and your 20% as those growth investments in new stores and offsite processing capabilities start to mature, and the initial headwind that we're seeing today start to convert into a tailwind again, early signs of which we've seen. So I think there will be no real material change to the totals or the headlines out of that model. Maybe it's a little bit different in the shape of it, but at the end of the day, we feel really confident.
Michael Mar: I think as far as the profitability, we should be able to continue to support EBITDA margins near 20% as those growth investments in new stores and off-site processing capabilities.
Michael Mar: start to mature and the initial headwinds that we're seeing today start to convert into tailwinds. Again, early signs of which we've already seen. So I think
Michael Mar: No real material change to the the totals or the headlines out of that model, maybe a little bit different in the shape of it, but at the end of the day we feel really confident in that.
Operator: Once again, if you'd like to ask a question, please press star and then the number one on your touchtone phone. Your next question comes from Mark Altschwager with Baird. Please go ahead.
Mark Altschwager: Thank you very much.
Speaker Change: Once again, if you'd like to ask a question, please press star, then the number one on your touch-tone phone. Your next question comes from Mark Walsh wager with Beards, please go ahead.
Amy Teske: Hi, this is Amy Teske on for Mark. Thank you for taking our question. I wanted to dig in on supply. Last quarter, you noted you were in a bit of an oversupply situation, so wondering an update on how you view your current supply levels, and then more broadly, any commentary on the quality of your supply and your supply mix.
Jubran Tanious: Yeah, hi Amy, this is Jubran. Good question. So yes, that's right. Last quarter, we were in a temporary oversupply situation. I would tell you that that has been solved, partly because of some moves that we're able to make to effectively kind of open a pressure relief valve and sell off excess, but also because of the new store pipeline that's just gotten more and more robust. So we look 18 months out when we're planning supply, and there are some new stores on the docket that weren't there three months ago that are going to consume some of that. So as we think about, you know, the drivers of supply for us, on-site donations and robust performance, as Mark talked about earlier, Green Drop, our nonprofit partner, delivers supply. It is really multifaceted.
Jubran Tanious: Yeah, hi, me, this is Jubran. Good question.
Jubran Tanious: So, yes, that's right. Last quarter we were in a temporary oversupply situation. I would tell you that that has been solved, partly because of some moves that we're able to make to effectively kind of open a pressure relief valve and sell off.
Jubran Tanious: excess, but also because of the new store pipeline that's just gotten more and more robust. So we look 18 months out when we're planning supply and there are some new stores on the docket that weren't there three months ago that are going to consume some of that.
Jubran Tanious: So as we think about, you know, the drivers of supply for us, on-site donations, robust performance as Mark talked about earlier, green drop, non-profit partner delivered supply, it really is multifaceted and we look at this market by market. So we continue to see strong OSD growth.
Jubran Tanious: We look at this market by market. So we continue to see strong OSD growth. We can flex delivered product as we need to. We are looking 18 months out. We've always done that, I would tell you.
Jubran Tanious: We can flex, deliver product as we need to. We are looking 18 months out. We've always done that, I would tell you.
Jubran Tanious: That discipline is more at a premium today than at any time because of all the new stores that are coming. We feel great about our supply situation. We feel great about the supply that's gonna feed the rest of the stores that will open in 24, as well as the stores that we're going to open in 2025, and then we're always looking to cultivate to look at the long-term equation, knowing that we're going to be opening 25, 30 plus stores per year going forward.
Jubran Tanious: That discipline is more at a premium today than at any time because of all the new stores that are coming.
Jubran Tanious: We feel great about our supply situation, we feel great about the supply that's going to feed the rest of the stores that will open in 24.
Jubran Tanious: as well as the stores that we're going to open in 2025, and then we're always looking to cultivate to look at the long-term equation, knowing that we're going to be opening 25 30 plus stores per year going forward.
Jubran Tanious: As far as the other part of your question, Amy, about quality, we have not detected any change in the average quality of what is flowing through our supply stream, be that delivered product, green drop, or on-site donation. We just are not able to detect that it's changed in any meaningful way. Hopefully, that answers your questions.
Jubran Tanious: As far as the other part of your question, Amy, on quality...
Jubran Tanious: We have not detected any change in the average quality of what is flowing through our supply stream. Be that delivered product, green drop or on-site donations, we just are not able to detect that it's changed in any meaningful way.
Amy Tewski: Yes, great, thank you. And then I was also hoping you could provide an update on Green Drop and where you are tracking to your 20 to 25 opening target. Thank you.
Amy Tewski: Hopefully that answers your questions.
Speaker Change: Yes, great, thank you. And then I was also hoping you could provide an update on GreenDrop and where you are tracking to your 20 to 25 opening target. Thank you.
Jubran Tanious: Yeah, absolutely. GreenDrop continues to progress. We're opening up new locations. But I'd say we're probably closer to the low end of that range.
Jubran Tanious: Yeah, absolutely. GreenDrop continues to progress. We're opening up new locations. I'd say we're probably closer to the low end of that range. Again, we've talked about this before. I mean, GreenDrop brings all of the elements that we know drive donations.
Jubran Tanious: Again, we've talked about this before. I mean, GreenDrop brings all of the elements that we know drive donation. Convenience being number one, reliably fast and friendly, and part of the daily, weekly routine for the donor. Municipalities love it, landlords love it, and donors obviously love it. The challenge is there's still an education process that has to happen because when you think about land use and municipal approval, GreenDrop is one of these attractive collection mechanisms that's actually not contemplated in a lot of the municipal land use codes that we run into.
Jubran Tanious: Convenience being number one. Reliably, fast, friendly, and part of the daily, weekly routine for the donor.
Jubran Tanious: So...
Jubran Tanious: Municipalities love it!
Jubran Tanious: Landlords love it. Donors obviously love it.
Jubran Tanious: The challenge is there's still an education process that has to happen because
Jubran Tanious: When you think about land use and municipal approval, Green Drop is one of these attractive collection mechanisms that's actually not contemplated in a lot of the municipal land use codes that we run into.
Jubran Tanious: So it's all part of the process. We have the team built, we have the assets, we have the know-how, we're tracking the performance of the new locations that we've opened over the last 18 months, and they're doing very well. So yeah, we'll continue to open these things, and it'll be an important eater of supply.
Amy Tewski: Great, thank you. Best of luck.
Amy Tewski: It's all part of the process. We have the team built. We have the assets. We have the know-how. We're tracking the performance of the new locations that we've opened over the last 18 months, and they're doing very well. So yeah, we'll continue to open these things and it'll be an important feeder of supply into the future.
Operator: We have no further questions at this time. Mr. Walsh, I will turn the call over to you for closing comments.
Speaker Change: Great. Thank you. Best of luck.
Operator: We have no further questions at this time. Mr. Walsh, I will turn the call over to you for closing comments.
Mark Walsh: Thank you, operator. I'd like to thank everyone for their time and interest in Savers Value Village, and we look forward to speaking with many of you in the days and weeks to come. Thank you very much.
Mark Walsh: Thank you, operator. I'd like to thank everyone for their time and interest in Savers Value Village, and we look forward to speaking with many of you in the days and weeks to come. Thank you very much.
Operator: Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: Ladies and gentlemen this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.
Operator: [inaudible]
Operator: Once again, if you'd like to ask a question, please press star on the number one on your touch tone phone. Your next question comes from Peter Keith with Piper Sandler.
Michael Mar: The CPC margin headwind and new store margin headwind are a little bit greater than you expected.
Mark Altschwager: Hi, this is Amy Tewski from Firmark. Thank you for taking our question. I wanted to dig in on the plight. Last quarter, you noted you were in a bit of an oversupply situation. So when can I get an update on how you view your current supply levels and, more broadly, any commentary on the quality of your supply and your supply mix?
Michael Lasser: Mark, my follow-up question isn't whether you or Michael or Gibran can comment on this since it has been about a year since the IPO, and the business has been a little bit more challenged than what you had anticipated coming out of the gate. So, A, outside of the macro, is there anything that you would attribute that more challenging management ability to drive the business to? And B, what do you think is the new or updated algorithm for the business in terms of new stores, comp rows, and margins as we look to 2025 and beyond?
Mark Walsh: This year, we are on track to open our targeted number of 22 stores plus an additional seven from the Two Peaches acquisition for a total of 29 new stores. We also feel good about the trajectory of our new stores for next year, with an initial plan of 25 and a more balanced quarterly cadence to our opening schedule. We opened four new stores and acquired seven Cupica stores in the second quarter. Our new stores, in total, are exceeding our expectations, with the U.S. stores performing especially strong.
Mark Walsh: African sales trends in our U.S. business remain solid throughout the quarter, with consistent low-single digital increases in both transactions and average basket, while business in Canada softened as the quarter progressed. Over the past few quarters, the Canadian economy has faced significant headwinds. GDP per capita has declined, and the unemployment rate has risen from 5.7% to 6.4% just in the first half of this year. Canadian household debt is over 100% of GDP, and household debt service costs have increased sharply to over 15% of household debt. Both are near historic.
Michael Mar: The biggest driver of the D-Leverage in the second quarter from last year was deliberate investments that we've made, number one in new stores and secondly in Offsite Prop. To a lesser extent, the third factor was the decline in King Canadian sales and some of the lever's pressure, as Gibran just said. So let's take each of those in turn and talk about how we think about them going forward.
Michael Mar: Salaries, wages, and benefits as a percentage of net sales increased 60 basis points to 18.4 percent, reflecting the impact of new stores and higher wages and benefits. Selling general and administrative expenses as a percentage of net sales increased 230 basis points to 21.6%. Primarily due to new stores and pre-opening expenses, along with information technology and general store expenses. Depreciation and amortization increased 18% to $17 million, reflecting growth investments in new stores, central processing centers, and automated book processing. However, interest expense decreased 43% to $16 million due to reduced debt and a lower average interest rate.
Mark Walsh: Equally important to our strategic positioning and the scaling of our business is off-site. Over the last several years, we have made a number of investments to enhance our processing capabilities, especially in all types of facilities, including central processing centers and warehouse processing facilities.