Q3 2024 Savers Value Village Inc Earnings Call
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Speaker Change: Good afternoon and welcome to Savers Value Village conference call to discuss financial results for the third quarter ending September 28, 2024. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
Speaker Change: 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.
Speaker Change: The comments made during this call and the Q&A that follows are copyrighted by the company and cannot be reproduced without written author relation 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.
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 of these risks and uncertainties.
Speaker Change: Please be advised that statements are current only as of the date of this call and, while the company may choose to update these statements in the future, it is under no obligation to do so unless required by applicable law or regulations.
Speaker Change: The company may also discuss certain non-GAAP financial measures. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in today's earnings release and SBC filings.
joining from management.
Speaker Change: On today's call are Mark Walsh, Chief Executive Officer, Jubran Tanious, President and Chief Operating Officer, Michael Maher, Chief Financial Officer, and Ed Yeruma, Vice President of Investor Relations and Treasury. Mr. Walsh, you may begin the conference.
Mark Walsh: Thank you and good afternoon everyone. We appreciate you joining us today.
Mark Walsh: Let me start by giving you a few highlights of our third quarter performance and then talk about the things we're doing to drive the business forward.
Mark Walsh: The overall trends we saw in the third quarter were within the range of our expectations. Our U.S. business remained steady and continued to generate positive comp sales growth, driven by increases in both transactions and average baskets.
Mark Walsh: Our Canadian business continues to be impacted by the challenging macro environment, with comp sales trends softening further early in the quarter for modestly improving more recently.
Speaker Change: You open nine new stores in the quarter, and we are on track to deliver against our target of 29 new stores this year.
Speaker Change: We also gained momentum on our new store opening plans for 2025. As a class, our new stores continued to perform well, with sales and earnings that exceeded our expectations.
Speaker Change: We also continue to see solid growth in our loyalty program with double-digit percentage growth in active members in both the US and Canada over the last year.
Speaker Change: Loyalty members accounted for 72% of our total sales in the quarter, up from 70% last year.
Speaker Change: Finally, the resilience of our business model allowed us to generate $82 million of adjusted EBITDA in the quarter for more than 20% of sales.
Speaker Change: The macroeconomic environment in Canada remains challenging with 6.5% unemployment and a rising cost of living that is especially hard on low-income consumers.
Speaker Change: While these factors have a lot to do with the sales trends we are seeing in Canada, we are not satisfied with our performance there. We have been actively testing different approaches to improve our Canadian business, particularly in the areas of selection and pricing.
Speaker Change: In our business, selection is a function of donations, processing levels, and the product we put on the floor.
Speaker Change: We know that fresh new product is an important driver of the business but at the same time we strive to align our processing and inventory levels with demand trends.
Speaker Change: Late in the second quarter and through the first two months of the third quarter, we pulled back on processing levels in response to softer demand in Canada.
Speaker Change: It's always a balancing act, but in hindsight, we believe we pulled back too far, which caused our sales trends to decelerate further. We began rebalancing at higher levels of production in September, and since then, we have seen modest improvement in our Canadian sales trends as a result.
Speaker Change: On the pricing side, we continue to test a number of different pricing and discounting approaches.
Speaker Change: We believe our overall value proposition is strong. That said, we recognize we have opportunities to sharpen price points in select categories and markets and believe this could help drive stronger sales. We continue to closely monitor this in the context of the competitive and macroeconomic landscape and make further adjustments as necessary.
Speaker Change: We are acting nimbly to navigate this challenging Canadian macroeconomic environment. We will continue to deliver a strong consumer value proposition while remaining focused on driving consistent and profitable long-term growth.
Speaker Change: While we continually work to optimize selection and pricing in the short-term, we are also thinking about longer-term opportunities to better utilize data and technology to drive further improvements.
Speaker Change: In both the U.S. and Canada, we built a culture of innovation with successful deployment of centralized processing, automated book processing, and self-checkout.
These capabilities are now firmly embedded in our business.
Speaker Change: By the end of this year, centralized processing will support 67 stores.
Speaker Change: Drift is still highly fragmented and an emerging sector, particularly in the U S. We are significantly underpenetrated in our existing U S markets and have virtually no presence in major regions, such as the south and the southeast.
Speaker Change: Roughly 60% of our new store openings in 2025 will be in the U S and that percentage will continue to grow over time.
Speaker Change: Overall, we expect new stores to be the primary driver of high single digit total annual sales growth over the long term.
Speaker Change: Critical to accelerating our new store growth is the expansion of our off site processing capabilities, our network of central processing centers and Offsite warehouse facilities enable us to open stores in locations that for various reasons can't support on site processing.
Speaker Change: This has proven to be a critical unlocked for our new store growth plans with more than half of our new stores going forward expected to utilize some form of off site process.
Speaker Change: As we continue to run more volume through this network and gain operational efficiencies. The cost per unit is declining we expect this trend to continue enabling more profitable long term growth and making offsite processing and even more important competitive differentiator for us.
Speaker Change: We're especially pleased that we were able to make such great progress against our strategic growth plans, even as we continue to navigate a challenging economic environment and Ken.
Speaker Change: We delivered an adjusted EBITDA margin above, 20%, which speaks to the resilience of our business model and our team's disciplined focus on execution.
Speaker Change: I am convinced our experience managing through this environment is making us a more dynamic company, which will serve us well as we enter a new phase of growth.
Speaker Change: In closing let me thank our more than 20000 team members for their work and dedication to the Sabres fans together, we are executing the business controlling what we can control and investing in our future.
Speaker Change: We know we have a tremendous opportunity in front of us and 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 Maher: Thank you Mark and good afternoon, everyone.
Michael Maher: As Mark indicated the overall trends that we saw in the third quarter were in the range of our outlook.
Michael Maher: The U S remains steady and sales were in line with our expectations.
Michael Maher: Canada was a little weaker than expected with sales at the lower end of our range.
Michael Maher: We opened nine new stores during the quarter and we are on track to open 29, new stores for the year.
Michael Maher: We also effectively managed our costs and delivered an adjusted EBITDA margin of greater than 20%. Despite top line headwinds further demonstrating the resilience of our financial model.
Michael Maher: Turning now to the income statement total net sales increased 5% to $395 million.
Michael Maher: On a constant currency basis, net sales increased one 2% and comparable store sales decreased two 4%.
Michael Maher: In the U S. Net sales increased six 2% to $212 million and comparable store sales increased one 6% driven by growth in both transactions and average basket.
Michael Maher: In Canada net sales declined seven 1% to $152 million and comparable store sales declined seven 5%.
Michael Maher: Primarily driven by declines in transactions.
Michael Maher: The timing shift in the Canada day holiday negatively impacted Canadian comparable store sales by approximately 100 basis points.
Michael Maher: Cost of merchandise sold as a percentage of net sales increased 300 basis points to 43, 3%.
Michael Maher: With the increase reflecting the impact of new stores and deleverage on lower comparable store sales.
Michael Maher: As a reminder, our new stores typically open at roughly half of their mature sales levels, resulting in lower profit margins in their first few years.
Michael Maher: As we accelerate our growth new stores will be a headwind to profit margins in the short to medium term. However.
Michael Maher: However, this headwind will subside and become a tailwind as a growing number of new stores work their way up the maturity curve.
Michael Maher: New stores typically achieve profitability by year two.
Michael Maher: More importantly investments in new stores are the highest returning use of our capital generating returns well in excess of our cost of capital.
Michael Maher: As Mark indicated we have made further progress on our store opening plans for 2025, and we now expect to open 25 to 30, new stores next year.
Michael Maher: Our 2025, new store opening plan will be more balanced throughout the year versus 2020 fours backend weighted opening cadence.
Michael Maher: Investments in Offsite processing are also impacting our cost of merchandise sold.
Michael Maher: Offsite processing entails additional activities and costs, including freight and overhead.
Michael Maher: <unk> and pressure on our profit margins when we open a central processing center or other offsite facility and work through the initial ramp phase.
Michael Maher: As we increase throughput and improve productivity in these facilities the cost per unit is declining.
Michael Maher: In our most mature CPC in the U S and Canada cost per unit is approaching the level of in store processing.
Our total cost of merchandise sold per pound processed was <unk> 65 in the third quarter compared to <unk> 64 in the third quarter last year.
Michael Maher: Salaries wages and benefits expense was $74 million.
Michael Maher: Excluding IPO related stock based compensation salaries wages and benefits as a percentage of net sales decreased 70 basis points to 16, 6%.
Michael Maher: The decrease was driven primarily by lower incentive compensation expenses.
Michael Maher: Selling general and administrative expenses as a percentage of net sales increased 50 basis points to 21, 3%, primarily due to new stores and Preopening expenses.
Michael Maher: Firstly offset by continued expense discipline.
Michael Maher: Depreciation and amortization increased 9% to $17 million, reflecting.
Michael Maher: <unk> and new stores central processing centers and automated book processing systems.
Michael Maher: Interest expense decreased 17% to $15 million due to reduced debt and lower average interest rates.
Michael Maher: GAAP net income for the quarter was $21 7 million or <unk> 13 per diluted share.
Michael Maher: Adjusted net income was $25 1 million or.
Michael Maher: Or <unk> 15 per diluted share.
Michael Maher: Third quarter, adjusted EBITDA was $82 million and adjusted EBITDA margin was 28%.
Michael Maher: U S segment profit was $43 8 million down $8 $5 million versus last year, due primarily to new stores and Preopening expenses.
Michael Maher: Canada segment profit was $45 4 million down $11 million versus last year, primarily due to comp store sales declines new stores and Preopening expenses.
Michael Maher: Turning now to capital allocation.
Michael Maher: We remain committed to a disciplined approach that funds our growth and strengthens our balance sheet.
Michael Maher: As our business continues to generate strong cash flow, we will continue to repay debt and be opportunistic in returning capital to shareholders.
Michael Maher: 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.
Michael Maher: Our balance sheet remains strong with $138 million in cash and cash equivalents and a net leverage ratio of two one times at the end of the quarter.
Michael Maher: We repurchased approximately one 8 million shares of our common stock during the quarter at an average price of $9 86 per share.
Michael Maher: As of the end of the third quarter, we had approximately $29 million remaining on our share repurchase authorization.
Michael Maher: Finally, let me discuss our updated outlook for 2024.
Michael Maher: Based on our third quarter results and the continued macroeconomic headwinds in Canada, we are narrowing our outlook ranges for the full year to the following.
Michael Maher: Total net sales to a range of 153 billion to.
Michael Maher: To $154 billion.
Michael Maher: Comparable store sales to a range of down 1% to flat.
Michael Maher: With the U S up low single digits, and Canada down low to mid single digits.
Michael Maher: Net income to a range of $44 million to $49 million.
Michael Maher: Adjusted net income to a range of $81 million to $86 million and.
Michael Maher: And adjusted EBITDA to a range of $290 million to $300 million.
Michael Maher: Our full year 2024 outlook remains unchanged for new store openings.
Michael Maher: We are still expecting a total of 29 new stores. This year, which includes 22 organic openings and the seven acquired <unk> locations.
Michael Maher: We closed two stores with expiring leases in the third quarter, bringing net new store growth for the year to 27.
Michael Maher: Finally capital expenditures are planned in the range of $105 million to $115 million.
Michael Maher: Just a few final details.
Michael Maher: Our outlook for net income assumes an effective tax rate of approximately 34%.
Michael Maher: And based on our share repurchase activity to date, we are now projecting weighted average diluted shares outstanding to be approximately $167 million for the full year.
Michael Maher: This does not contemplate any potential future share repurchases.
Michael Maher: This concludes our prepared remarks, we would now like to open the call for questions operator.
Speaker Change: Thank you Sir.
Speaker Change: Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your Touchtone phone. You will then here is when you told from acknowledging your request and if you would like to withdraw from the question queue simply press Star followed by two and if you are using a speakerphone you will need to lift the handset first before pressing any keys.
Speaker Change: Please go ahead and Crestar one now if you have any questions.
Speaker Change: First we will hear from Matthew boss of Jpmorgan. Please go ahead.
Matthew Boss: Great. Thanks.
Speaker Change: So maybe to kick off Mark could you elaborate on the progression of same store sales trends that you saw in the third quarter and maybe just trends that you've seen so far in October early November in the U S and Canada.
Speaker Change: Hey, Matt, Yes, the trend in both Canada, and the U S improves.
Speaker Change: From July through September and that trend has continued into the early fourth quarter.
Speaker Change: Great and then Michael maybe from a Bottomline perspective could you help breakdown drivers of the third quarter gross margin contraction.
Speaker Change: Maybe how best to think about puts and takes in the fourth quarter and just as we look forward.
Speaker Change: If there was a way to kind of think about maybe the profile for same store sales. If it's low single digit same store sales how best to think about year over year margin profile, maybe in next year relative to multiyear.
Speaker Change: Yes, Matt you got it so let me try to take those in order here. So gross profit margin deleverage in the third quarter.
Speaker Change: There's really two drivers.
Speaker Change: It's new stores and its deleverage on the lower comp sales and so just as a reminder, on new stores. When we open those we're at roughly half of our mature sales levels and so we don't have the same level of gross profit or net EBITDA profit.
Speaker Change: Now the stores do grow rapidly they are typically profitable by year or two but that is a temporary headwind when we opened the store.
Speaker Change: The good news I would say on the third quarter is weak.
Speaker Change: <unk> talked about this a little bit last quarter, but our investments and offsite processing are really starting to be mitigated by the improvements that we're making in the cost per unit of the existing ones. So at this point in our most mature CPC is in both countries. The U S and Canada. The cost per unit is now approaching parity with in store.
Speaker Change: Processing and therefore, we're at a point, where our total blended cost of merchandise sold per pound that we processed during the third quarter with 65% this year versus 64 since last year. So we're really pleased with that now as we make additional investments in off site processing.
Speaker Change: Again that will be a temporary increase related to that to that particular facility, but that will continue to be mitigated as we drive improvement in all of the existing facilities.
Speaker Change: As far as the fourth quarter.
Speaker Change: Similar trends, we do expect deleverage again in the fourth quarter due to new store openings and the degree of that deleverage just really depends on how our sales play out relative to that guidance range. So if you think about the low end of our range. It would assume overall deleverage versus Earl y.
Speaker Change: Pretty similar to what we saw in Q3 and at the higher end, we would have less deleverage because.
Speaker Change: Better sales would help mitigate that new store impacted so at the higher end, it's more like it's about 100 basis points less deleverage than we had in Q3.
Speaker Change: So to your last question, Matt about the long term algorithm and the margin profile look I think I think when we're at a steady state of growth.
Speaker Change: You know a low single digit comp is sufficient for us to maintain an EBITDA margin from one year to the next.
Speaker Change: We are just now embarking on the beginning of this growth phase.
Speaker Change: And that has implications right so.
Speaker Change: As we just as I, just talked about with the dynamics of new stores and the way they open up and so it's not going to be a straight line I think the long term algorithm that we've discussed we still believe in high single digit total revenue growth low single digit comps and and growing EBITDA consistently with revenue.
Speaker Change: But it's not a straight line in the near to medium term is we're accelerating the new store openings, we're going to have some headwinds.
Speaker Change: And given the back half weighted nature of our openings here in 'twenty four and the fact that we're now opening up to 30 next year.
Those headwinds will likely continue into 2025, but as we round the corner into 2026, we will have a significant number of.
Speaker Change: Young stores that are beginning to mature that are reaching their second year that are profitable and starting to provide a powerful tailwind and helping us deliver on that long term algorithm.
Speaker Change: That's great color best of luck.
Speaker Change: Thanks, Matt.
Speaker Change: Next question will be from cross with Goldman Sachs. Please go ahead Brook.
Speaker Change: Good afternoon, and thank you so much for taking our question really appreciate it Mark I was hoping you could elaborate on the test that youre doing to improve that performance in the Canadian business, where those idiosyncratic test the primary driver of the improvement in the comp as you move through the quarter are those costs showing EBITDA.
Speaker Change: Profit margin improvement as a result of some of these revenue drivers and is this something that you think you can copy over to your U S business to sequentially accelerate results there as well.
Speaker Change: Yes. Thanks, Thanks Brook, Great question. So as we think about let's start with the tests and what we did over the last six months.
Speaker Change: And we tested several promotional and pricing strategies to spur demand.
Speaker Change: Promotional cadence promotional rate, we did some episodic sale events outside of our planned marketing calendar.
Speaker Change: We actually in one store, we did wholesale price reductions throughout the soft part of the business.
Speaker Change: And then the last test was the strategic price reduction by category and grade.
Speaker Change: And as we look to add.
Speaker Change: Those tests and and the.
Speaker Change:
Speaker Change: And the results were most encouraged by the strategic price reductions by category and Greg.
Speaker Change: Look obviously retail is a dynamic business.
Speaker Change: This year and in tandem with those Canadian tests, we have invested in some new tools and processes to monitor our consumer proposition relative to the perceived price value.
Speaker Change: And that perception versus our competitive set.
Speaker Change: Through this process look we don't believe wholesale changes to our price points are warranted. However, we have identified and executed in this test.
Speaker Change: <unk> targeted changes in selected categories and grades where we felt competitive pressure and as I stated we were encouraged by the results relative to the control group. So we've put in place as we roll out these tools and those associated processes that I mentioned that accompany those tests, we will in fact be adopting this approach through <unk>.
Speaker Change: North America in early 2025, we're really excited about that so why now we've always been mindful of.
Speaker Change: This competitive pricing landscape and look some local competitors have executed at a more aggressive pricing philosophy, necessitating our acceleration into this investment in the tools and the process that I alluded to but by sharpening our pricing approach along with rebalancing processing, which I think was really the the more.
Speaker Change: Fluence will factor in that improvement trend line throughout the quarter at this point, we believe and we're talking about value village, Canada, We believe valuable as Canada shows a better to our consumer and then optimize really for us the market share stability and growth.
Speaker Change: I think from an impact perspective short term the Canadian macro is still bulk of the issue.
Speaker Change: We don't expect a material impact to the fourth quarter based on these test results. This is about select geographies categories and grades.
Speaker Change: Chris.
Speaker Change: In response to some competitive pressures, we're seeing in specific markets not wholesale changes to our pricing.
Speaker Change: Well look regardless of the outcome, we are much more attuned to what is happening competitively around pricing, we're going to be much more proactive in adjusting price and delivering a sharper valued consumer proposition not just in Canada, but in North America in general.
Speaker Change: Look I do think as an average unit retail of $5 USD.
Speaker Change: We still we continue to offer tremendous value.
Speaker Change: Great. Thanks for the color and then Mike can you comment on the early margin implications of some of these tests or is it still too early to tell.
Michael Maher: Yes, we're not expecting significant implications to either sales or margins in the fourth quarter, we were encouraged but.
Michael Maher: What I would say is that yes, you saw the implications of lower comps in Canada in the third quarter. The vast majority of our costs our cost of goods I should say our labor.
Michael Maher: And so.
Michael Maher: It benefits us our model benefits when we deliver healthy sales yield.
Michael Maher: And so we were pleased with the the metrics that we saw in these tests to sales we think.
It is possible to do that without compromising margin over the long term.
Michael Maher: But we will see how that continues to play out and as I said.
Michael Maher: I don't think youll see meaningful impact from the fourth quarter.
Speaker Change: Great. Thank you so much I'll pass it on.
Speaker Change: Thank you next question will be from Mark <unk> of Baird. Please go ahead Marc.
Good afternoon, and thank you for taking my question just first with respect to the guidance.
Speaker Change: You're holding the LOE and bringing down the high end just talk us through the thought process there.
Speaker Change: Are you assuming that the October comp trend Youre seeing continues through the balance of the quarter just the overall, what's giving you confidence in that lower end.
Yeah. Thanks, Mark I mean really the narrowing to the lower half essentially is just a reflection of the way the third quarter played out.
Speaker Change: As I mentioned in my prepared remarks, we had the us was <unk>.
Speaker Change: Pretty much in line with the trend we've seen for most of the year in <unk>.
Speaker Change: Squarely in the middle of our expectations, Canada, a little bit on the softer end.
So as we think about going forward into the fourth quarter.
Speaker Change: We are not first of all let me just start with the macro assumptions, we're not assuming any significant change in macro conditions in either the U S or Canada in the fourth quarter at this stage with less than two months left that seems like a reasonable assumption to us.
Speaker Change: But at this point.
Speaker Change: The range of possible outcomes that we've contemplated there.
Speaker Change: Reflects a pretty narrow range for the U S. We've very consistently seen low single digit comp growth in the U S. All year long and across geographies and Thats what were assuming will continue in the fourth quarter.
Speaker Change: Really at this stage the open question the variability in the range is Canada.
Speaker Change: We think we could be down anywhere from low single digits to mid single digits in the fourth quarter.
And the way I would describe that is on the low end it would be.
Speaker Change: More or less consistent with the third quarter trend I mean remember we did have a 100 basis point impact from the holiday shift, but if you normalize for that the low end assumes we really don't see much improvement whether it from any of the efforts that Mark described selection pricing the slightly easier comparisons versus last year.
Speaker Change: And the higher end assumes that we do see something from that and I think we're encouraged by.
Speaker Change: That trajectory, we certainly exited the quarter on.
Speaker Change: On a better trends than we started it.
Speaker Change: And thus far that has continued into the fourth quarter.
Speaker Change: Yes.
Speaker Change: Very helpful. Thank you and then just a follow up on the production and inventory flow topic.
Speaker Change: For Canada, you mentioned that you pulled back perhaps too much there wasn't enough newness and then you ramped it back up.
Speaker Change: What data are signals are you using to manage that kind of on the week to week month to month basis, and I guess the learning there would maybe seem to imply a limit to the margin flexibility. So.
Speaker Change: How should we think about that I guess, what is the baseline comp that is needed to hold four wall gross margin flat given that there's this minimum labor investment to just kind of feedback newness on the floor. Thank you.
Speaker Change: Hey, Mark this is djabran, it's a great question.
Speaker Change: As Mark and Michael talked about selection is a critical component of the value proposition by selection I'm, referring to the sheer number of items at a store might put to their floor in a week. So.
Speaker Change: Yes, we think we pulled back a little bit too hard in Canada, we've since readjusted.
Speaker Change: As always a balance right between up preserving and protecting profitability and then ensuring a steady flow of fresh product for the customer and we do our best to match supply and demand in that way like any manufacturing operation would.
Speaker Change: But yes, it's true we can modulate production, but to your question within a certain control limit right say plus or minus a few points and I think we've really appreciated that over the last quarter I would also say to your point of what do we index too.
Speaker Change: If you look at transaction volumes.
Speaker Change: Sure.
Speaker Change: And we tried to match up where we think transaction volumes and transaction comps are going with a number of items that are going to the sales floor.
So I think as we've as we go forward we have.
Speaker Change: Raise production levels in Canada.
Speaker Change: I think we think about it in terms of.
Speaker Change: Going forward a much more gradual flexing of production levels over longer Timeframes write one or two weeks does not a trend Mick what I'm, describing and the number of items that hit a floor for transaction. So as we go forward. We're thinking about this more in terms of we will.
Speaker Change: Always look to manipulate and optimized production levels, but doing that in a more <unk>.
Speaker Change: Gradual way.
Speaker Change: And over a longer timeframe if that makes sense.
Speaker Change: That does thank you for all the detail.
Speaker Change: Mark.
Speaker Change: Thank you next question will be from Bob <unk> of Guggenheim. Please go ahead.
Speaker Change: Hi.
Speaker Change: Good afternoon.
Speaker Change: If I could just focus a little more on some of the discussion around the new store economics, just as you continue to open stores and you go for 30 next year just in terms of the.
Speaker Change: The paybacks are the new store investments like any any other sort of <unk>.
Speaker Change: A number you can share with us just around what youre seeing I know they seem to be performing pretty well, but it will be helpful. If we could get a little more of a framework around some of these things.
Michael Maher: Hi, Bob It's Michael sure happy to talk to Economics, and then maybe I'll, let Jay Brian just talk a little bit about <unk>.
Speaker Change: More specifically the recent performance of our new store class so.
Speaker Change: As we've talked about before and as I mentioned earlier, when we opened a new store typically in the first year. It does roughly half the volume that it will do when it reaches maturity, which we define as about year five.
Speaker Change: And so because of that and we've got some fixed cost that we are not yet leveraging and our production we're not fully up to.
Speaker Change: Our mature store level of productivity on production and sales yield on that we typically see new stores lose money in the first year.
Speaker Change: But they grow quickly on the topline and we're typically profitable by the second year.
Speaker Change: And so yes.
Speaker Change: Over the course of the life of the store.
Speaker Change: We as we see that growth play out and the store quickly becomes cash flow positive, we're generating very healthy returns we're seeing.
Speaker Change: Returns.
Speaker Change: Typically around double or better our cost of capital.
So, but the implications to our EBITDA and our EBITDA margins in the near term I think.
Speaker Change: The Gist of your question is it's a headwind, especially as we're starting from.
Speaker Change: The place we're in today, where we really Havent had.
Speaker Change: Anywhere near the level of new store openings that were now about to embark on.
Speaker Change: If we are embarking on here in 2024 and that we expect to accelerate into 2025.
Speaker Change: What that means is that we've got a significant number of new stores that are still in that year, one point, where they are not profitable.
Speaker Change: And we don't yet have a critical mass of stores that are in their second or third years generating better than average comps and quickly growing their bottom lines.
Speaker Change: That's especially pronounced that impact on the back half here of 2024 as we are opening opening 18 of our 22 new stores this year in the back half.
Speaker Change: And then going into 'twenty, five where we'll open up to 30 more new stores.
Speaker Change: But as those stores work their way up the maturity curve and enter their second years, that's going to start becoming a tailwind and I'll use the 2023 classes as a good example of that.
Speaker Change: We opened those in 'twenty, three theyre not yet comp stores by our definition that will be next year.
Speaker Change: They're maturing exact exactly as we would like in fact, we're very pleased with those and <unk> can speak to that but there.
Speaker Change: They are profitable that group is profitable now both countries.
Speaker Change: All but one or two of the stores in that group individually are profitable and so the class as a whole is profitable as well and so that's the dynamic that we expect to play out on our future cohorts as well.
Speaker Change: And Bob Djabran here I'll, just just to add on to what Michael said that obviously pleased with how the new stores are performing in aggregate, both topline and bottomline.
Speaker Change: Also pleased that our predictive model that we use when we approve and sign a lease for any new store.
Speaker Change: Is showing that no model is perfect, but it's been pretty close to the pit and that that really gives us confidence as we look to.
Speaker Change: Find good deals accelerate and do them quickly.
Speaker Change: Because again.
Speaker Change: The pipeline's growing any new deals that we have flowing at this stage of the game are we're talking about early 2026 now.
Speaker Change: So we're starting to fill up the pipeline for early 2026 stores I think we've mentioned in the past that.
Speaker Change: We were back loaded on new stores opening this year right with the preponderance of them in Q3 and Q4.
Speaker Change: But now we are in a steady state, where we expect new store openings within reason to feather across the quarters from here on out certainly across 2025, and a more balanced way.
Speaker Change: And that just makes things a lot easier for the team helps ensure execution all of the things that we would expect.
Great. Thank you good luck.
Speaker Change: Okay.
Speaker Change: Thanks, Bob.
Speaker Change: Next question will be from Randy <unk> at Jefferies. Please go ahead Randy.
Randy: Yeah, Hey, a quick clarification item can you just give me the.
Randy: The percent increase in onsite in green dropped donations during the quarter and then what percent of the.
Randy: Total pounds processed in the quarter.
Randy: Okay.
Speaker Change: Sorry, Andy what was the second part of your question there.
Andy: The percent of the total pounds.
Andy: It came in that you've got you guys processed through green dropped.
Andy: Oh.
Speaker Change: Through Green drop are you mean through onsite donations.
Speaker Change: Yes, yes, sorry.
Speaker Change: Through onsite donations.
Speaker Change: First things first is.
Speaker Change: Getting from a third party.
Speaker Change: For delivery, yes gotcha.
Speaker Change: Yes, so we're north of 75% on that.
Speaker Change: Randy I'll get you the specific percentages on that.
Speaker Change: Randy what I will say is.
Speaker Change: Onsite donations as a percentage of our total processing continues to be very robust I think mikes Michael's right. We will get the exact percentage on that but we do know is that onsite donations continue to comp positive.
Speaker Change: Across the fleet.
Now there is weeks here and there.
Speaker Change: Store by store, but in general.
Speaker Change: We are seeing pretty robust growth.
Speaker Change: And onsite donation comps.
Speaker Change: So Randy just to give you the exact number on that just shy of 80% was onsite donations in green dropped combined and Thats up from.
Speaker Change: Around 78% last year.
Speaker Change: Alright, alright, so that metric continues to grow that's good yes.
Speaker Change: And then can you.
Speaker Change: Just kind of I might have missed it I jumped on late here just how did you talk about kind of the <unk>.
Speaker Change: Actions are trying to take to mitigate.
Speaker Change: Kind of a macro difficulties in Canada like what act.
Speaker Change: You're trying to kind of what are you looking at to try to change maybe drive more traffic.
Speaker Change: What are you what are you doing up there just to give us more of a flavor that may or may not have covered already.
Speaker Change: Thanks, Randy we did cover that happy to quickly go over it and if I.
Speaker Change: Lemonade some of the detail so not to be repetitive we can catch up with you second Dara look we we completed five significant promotional and pricing strategy tests over the last six months was the most promising result, being strategic price reductions by category and grade.
Speaker Change: Along and in tandem with those tests, we have invested in some new tools and processes to monitor our consumer proposition relative to perceived price value versus the competitive set we don't think wholesale changes to price points are warranted bus, but it's important we have identified.
Speaker Change: Executed in the test very targeted changes in select categories in grades, where we felt competitive pressure and as I stated earlier, we're encouraged by these results and as.
Speaker Change: As we rollout this further in Canada, and we're going to roll out these tools and these processes throughout North America will be adopting this approach.
Speaker Change: In North America in early 'twenty five throughout the entire North American fleet and I can fill in some details for you separately.
But I don't want to repeat a lot of the stuff we said already.
Speaker Change: Awesome. Thanks, so much.
Speaker Change: Thanks, guys.
Speaker Change: Thank you next question will be from Peter Keith Piper Sandler. Please go ahead Peter.
Speaker Change: Alright, Thanks, good evening, so Michael maybe on the gross margin pressure for the quarter I was hoping you could quantify the pressure that youre seeing from the new stores, because it's coming across very clear that this is going to remain a pretty consistent headwinds for at least the next year. So I guess, if you could break it out it would help us to to put that into our models.
Speaker Change: <unk>.
Speaker Change: Yes, yes.
Speaker Change: I'd say, Peter it's pretty.
Speaker Change: Insistent roughly equal between those two factors of new stores and deleverage on the lower comps.
Peter: Okay very helpful.
Speaker Change: And then Mark maybe for you just on the Canada backdrop, maybe I just need a little bit of hand, holding here that if you've done any research on the economy. There other retailers seeing pressure because we're just not seeing other retailers called out Big Canada weakness I know theres, some Canadian retail sales for apparel.
Speaker Change: And those that's run positive in recent months.
Speaker Change: What are you guys seeing this sort of makes you feel like it is macro and not company specific.
Speaker Change: Well, Okay lets start we'll start with some economic facts that we're seeing we know there are a lot of macro pressures in Canada unemployment, the Michael mentioned housing crisis.
Speaker Change: And as reported by Statistics, Canada apparel sales are down in Canada every single month this year as reported by.
Speaker Change: The Canadian government, so year to date, we seem to be holding our own versus the broader market again, we're not we're not terribly pleased with our results given our comp performance. So should we think about who is that value available village consumer in Canada look it's a broad cross section of the consumer landscape.
Speaker Change: <unk> highly penetrated 90% brand awareness, we estimate were in one in three households, but we've done some some work and third party surveys for shoppers first shoppers, especially are coming under greater financial stress and while were seeing modest trade down in our environment as higher.
Speaker Change: Income households, as a percent of our total customer base has risen that has been more than offset by a pullback in lower household the.
Speaker Change: Lower household demographic and just as a reminder, over 20% of our consumers live below the poverty line, so theyre, making tradeoffs on necessities and we think really theyre sidelines. So ultimately what we're seeing from our loyalty base from a non loyalty basis frequency.
Speaker Change: <unk> has declined attrition has actually been very stable and low so we feel good about our long term outlook, because we have not seen people.
Speaker Change: Chris, but we have seen frequency decline so we're not expecting material improvement in Canada in the near term. Some economists are projecting some modest improvement in 2025, we will continue to watch unemployment household that consumer spending data and our own loyalty and survey data until then we're trying to control what we can control.
Speaker Change: And taking a more cautious approach to planning.
Speaker Change: We're certainly looking to increase innovation operational effectiveness to be ready for that economic improvement take advantage of that long term I think in terms of our long term.
Speaker Change: Perspective, especially when it comes to new stores, we've always planned to pivot growth to.
Speaker Change: To the U S versus Canada.
Speaker Change: I think the current macro situation is reinforcing this so as we think about your new stores in 2025, there will be much more heavily weighted to the U S than they are to Canada, hopefully that answers some or most of your question.
Speaker Change: Yes. It does thank you very much.
Speaker Change: Thank you next question will be from Michael Lasser at UBS. Please go ahead Michael.
Speaker Change: Yes.
Speaker Change: Yes.
Speaker Change: Okay.
Speaker Change: Your line is open Michael Please go ahead.
Speaker Change: Good evening this is Seth.
Speaker Change: <unk> on the line for Michael Lasser. Thank you for taking our question.
Speaker Change: We wanted to know given the soft top line throughout the year and this quarter's current performance what app.
Speaker Change: <unk> would you need to taken the business beyond the near term strategies in Canada to bridge the gap between this quarter and your long term algorithm. Thank you.
Speaker Change: Yes.
Speaker Change: I think.
Speaker Change: Obviously, the biggest gap I think as you describe it would be the macroeconomic environment in Canada, and our comp performance, there and mark laid out some of the factors that we think are in our control that can influence that and improve that and in fact, so far we've already seen some measurable improvement in Canada over.
Speaker Change: The last few months from our efforts in selection alone so our exit rate into the quarter and entering the fourth is better than our third quarter comp.
Speaker Change: But we will continue to strive to get that balance right. We're going to continue to work on the.
Speaker Change: Look our thesis going into that was that these stores have a lot of opportunity. So of the seven stores. We have over the last six months converted two of the seven stores and buy convert I mean put onto the savers model of how we show up to the customer and that tactically that means <unk>.
<unk> levels.
Speaker Change: Merchandising techniques.
Speaker Change: Selection and floor turn calibrating space to sales a whole host of tactics.
Speaker Change: And the Great news is that we are seeing significant.
Speaker Change: Double digit comp sales growth in both of those locations.
Speaker Change: So pleased with that.
Speaker Change: When we choose to first to understand what the road map should look like for conversion of the remaining five and I would say based on what we've learned we feel great about it over the coming.
Speaker Change: 12 to 18 months, we look to convert the rest of them.
Speaker Change: And then build out upon that with some of the new store growth that Michael talked about earlier, where.