We do all the vinyl that is sold at the stores in Walmart. And at the store level, you have a curated section of about 700 titles in that store. Well, they also have more vinyl available at walmart.com. And when you go to walmart.com, we have over 30,000 unique vinyl titles in stock. And those titles are all up on walmart.com, consumers can go and order that title, it comes into directly that right away to our warehouse, same day we’re shipping that out to the consumer with Walmart’s name on it and so forth. So big part of our winning formula there is we’re this fulfillment house for all the entertainment products on all the major retailers. And the last point is they love it, because they have no inventory risk, there’s no inventory on hand for them, they just complete the sale, it gets shipped out, it’s incremental sales for them, incremental profitability, it’s a definite winning formula.
And we’re continuing to focus a lot of our energy and attention to expanding our e-commerce capability and customers there.
Bruce Ogilvie: I think your question though is how is it going to affect us in the four quarters. We definitely see that those numbers — that percentage should hold up and it’s not hurting us in any way there. Whether we ship one or two units to every consumer or we ship a box into retail, we price it accordingly. So we maintain the same margins we always have, because we have a business to run, not a charity.
Jeff Walker: Correct, it’s a profitable business on the consumer direct.
Mike Zebran: And we expect that mix to continue to climb going forward. Is that the right way to think about it?
Bruce Ogilvie: I don’t think you could say it was going to…
Jeff Walker: I don’t know if it will grow as fast as it did this year-over-year, but it’s definitely growing and will continue to expand.
Bruce Ogilvie: On arcades, our business has shifted more to shipping direct-to-consumer than shipping to brick and mortar. And so those are high dollar ranks, so that has a weighting effect to some degree. And it’s better for everybody involved to not try and ship it into brick-and-mortar retail. There’s freight cost to get it into retail and then you got to turn around and if they’re going to ship it to the consumer, it’s better they just go from one central point is the way we have it set up now, it’s all on the west coast, it comes in, we don’t have to schlep it across the country to redistribute it again. So I think we’ve got it all dialed in and out, it’s the most efficient it can be for the retailer and for us.
Jeff Walker: And one last thing. One thing that didn’t really get into the Q4 numbers is we took over all the music and video direct-to-consumer business for target.com, and that really went live like mid-December. So it really didn’t click into those numbers for this last quarter, and that’s a big increase for us. They’re doing a lot of vinyl and they’re doing a lot of K-pop on the music side, as well as new releases in all the movies and TV shows.
Bruce Ogilvie: And Taylor Swift is hotter than a pistol and Target has really leaned in heavily on Taylor Swift, and there will be a big target exclusive for Taylor Swift, her new album comes out that we all heard announced at the Grammys.
Mike Zebran: One more from me. The gross margin improvement in 2Q is pretty large. I think we’re at 11% versus around 4.7% last year. Let me just specify the drivers of the improvement. So I guess how much was mix improvement and shedding lower margin revenues versus cost cutting?
Jeff Walker: Well, I think on the gross margin, the bulk of the gross margin improvement is that we didn’t have the big write-offs and adjustments that really reduced it in 2022. But we have seen margin improvements in some of our vinyl sales and we’ve also seen it definitely in our arcade sales. So we were really, I would say, abnormally low in 2022 with the 4% range of gross margin, that was not in our historical history there. So the change is kind of an anomaly. So we’re more in the consistent range that we’re in now in this last quarter going forward. We won’t see it go back to the 4% is another way to say it.
Operator: Our next question comes from the line of Douglas Hobbs with Hobbs Family Office.
Douglas Hobbs: It seems Alliance is utilizing software and technology much better these days. Can you expound on any cost savings, compliance and controls improvements?
Bruce Ogilvie: So Jeff mentioned that we installed AutoStore, I call that a Rubik’s cube of auto storage retrieval system. We put that in our Kentucky facility. We’ve had it — we’re on our 13th month now of actually using that new piece of equipment. And basically you have all these totes, and think of a tote as a shelf location. And instead of the picker walking — normally a picker will — when they pick an order, they walk from different shelf location around our warehouse. And now with this system there, the picker just — the processor or picker stands in one location and all the shelf locations are brought to the picker. And that way it cuts down the travel time. And even with all our other efficiencies and coming up with very efficient pick paths, the best we could do is ride around 120 shelf presentations in an hour.
And we’ve been able to improve that to be above 300 shelf presentations in an hour. And the main reason is that every 10 seconds, the person standing at the processing station, the tote gets delivered to them or the shelf and then they tells them how many they need out to that shelf location and they pull the quantity and then say, okay and then the next shelf presentation gets presented to them and they do the next one. We went from 41 people walking around pulling orders, vinyl orders in the warehouse down to seven, and we get the same benefits and efficiency on the put away side. When we receive the product, we have to go find an empty shelf location to put it away and store it and tell the system how many we put in that location, so that we can know where to find it when we need to pick it for an order.
Well, now nobody has to walk to the warehouse and find an empty shelf location. An empty shelf comes to the receiver where they do the receiving end of the AutoStore system there. And now you just tell the system how many you put in there and scan the barcode and boom off it gets put away. And once it’s received right there, it’s available for picking right away. So using AutoStore for our vinyl, which was one of our most expensive areas as far as picking goes, it’s like 3 times the cost of picking a vinyl LP versus a CD or DVD. And we’ve been able to cut those costs. The AutoStore’s savings of right around $3 million to $3.5 million a year. We do have a lease on it, that’s a four year lease and it was a $10 million original purchase price there but we’re looking, we’ll have a payback in 3.5 years.
So we’re quite happy with those type of things that we’re doing.
Operator: There are no more dial-in questions. We will now take questions from the webcast.
Unidentified Company Representative: Our first webcast question asks, are you looking or working on any new acquisitions currently?
Jeff Walker: We are always working and looking at new acquisitions. We did our last big acquisition back in September of 2020 right in the middle of COVID. Looking back on it, it was kind of crazy to complete a big acquisition at that time. As we go forward, now that we have our new bank line of credit in place and we’ve stabilized with our inventory and our operations and so forth, we’re definitely back looking at acquisition opportunities here in 2024. One of the things that is an opportunity for us is our diversity of products that we sell and the focus on everything entertainment gives us really a pretty wide net of different businesses that can really complement what we’re doing at Alliance. There’s kind of two different types of acquisitions that we look at.
One of which is something that might be a competitor to us in one of the categories or has a lot of similar products. And those consolidation opportunities are very accretive to value for us as we can acquire them and have a lot of consolidation cost savings. And then we also are looking at opportunities where companies have other entertainment products that we don’t currently sell. Those are very valuable for us as well, because they may have a different set of customers that they sell to and we have our vast selection that we can sell to their customers. And then additionally, their product can also come in and flow into our vast group of retailers that we sell to. So there’s quite a bit of opportunity there within the entertainment industry.
And the last point I guess I’d mention is, the valuation on some businesses has definitely come down since two to three years ago. So we definitely see some potential opportunities for some good acquisitions that would really be accretive to value in the company.
Unidentified Company Representative: Our next webcast question asked, on the closing of your Minnesota facility, what impact will that have on your profitability?