So in other words, while we do expect an increase in merchandise margin, we’re not intending to maximize this increase. Our intent is to prioritize sales comp growth. The second item I mentioned is the lower freight expenses. We’re up against extraordinarily high freight costs from last year, particularly in the first part of the year, and we expect to see lower freight expenses especially in Q1 and Q2. The third source of margin expansion is the leverage on store fixed expenses, like occupancy. Of course, some of this will depend on the level of comp sales, which is yet another reason why we’re focused on the top line. There are also headwinds built into our 2023 guidance. These include limited or less improvement in supply chain given that increased mix of true close-out merchandise and also the resetting of incentive comp, assuming that we hit our plan.
For 2023, I’d like to stay away from specific line item guidance, and the reason is this year our overriding strategy is to drive sales. We recognize that means we need to be flexible, so depending on how the year unfolds, there may be times in the year we might want to sharpen our values to further drive sales, which could drive a slightly lower merchandise margin but greater leverage on fixed expenses. To recap, on the 3% to 5% comp growth, we expect to achieve 80 to 120 basis points of operating margin expansion. We believe this will come from three primary sources: merchandise margin, freight and leverage on store fixed expenses, but the contribution from each of these will really depend on how the retail and competitive environment unfolds this year.
Operator: Our next question comes from the line of Ike Boruchow from Wells Fargo. Please proceed.
Jesse Sobelson: Good morning everyone, this is Jesse Sobelson on for Ike. Congratulations on your improved trend in Q4. I just have a couple of questions. Firstly, I am wondering whether the improved trend means that the merchandising mistakes that you described back in November are now behind you, and I have a follow-up for Kristin.
Michael O’Sullivan: Good morning Jesse. I think to answer that question, and as much as I hate to do this, let me start by describing the specific execution mistakes that contributed to our performance last year. If I was to share our internal post mortem, I would say that those mistakes fell into three main areas. Firstly, given the uncertain environment as we came into 2022, we deliberately planned inventory levels conservatively – this is a year ago, and those conservative inventory levels backfired on us. Like many other retailers certainly in the first quarter of last year and coming into the first quarter of last year, we experienced significant receipt volatility and delays, and those delays meant that we just ended up with too little on-hand inventory in our stores, and that really undermined our sales trend.
The second thing I would say is in 2021, going back to 2021, we were reluctant to push up prices. Many other retailers at the time were talking about raising retails. We were reluctant to do that, but then as we came into 2022, I think we kind of questioned ourselves and said, well, maybe we’re wrong, maybe we should start pushing up prices, so we added higher retails into our 2022 plans to really happen in the summer and into to back half of the year. Now in retrospect, with the impact of inflation on our core customer and with the higher promotional activity across retail, that was just not a good time to go raising prices. As we got into the full season, we realized that and we began to unwind those increases. Now, we should have done that sooner, but–anyway.
