Not surprisingly, too much supply, too little demand equals off-price availability, and that’s what’s happened. But there are a couple other points that I’d like to make about merchandise supply. Firstly, as the third largest off-price retailer, this supply environment has given us the opportunity to open up new vendors and resources and to deepen relationships with existing vendors. We’ve worked very hard to partner with vendors to help them move excess inventory over the last few months. Our buyers have been very, very focused on that – we’ve been very responsive to vendors, and I think those new and expanded relationships are going to be very valuable to us strategically over the longer term. The second point to make is our expectation is that the buying environment is likely to remain fairly strong well into 2023, especially if the economy slows down and demand continues to soften.
When you look at off-price availability over a longer time period, I think the real aberration is not how strong supply has been over the last six months. There have been plenty of times like this in the past. The real aberration is how constrained supply was between mid-2020 and early to mid 2022. Those constraints during that two-year period were driven by global supply chain issues coming out of the pandemic – we really hadn’t seen those before. We think it’s possible that the strong merchandise availability that we’ve seen over the last six months, it may just herald a return to normal.
Lorraine Hutchinson: Thank you.
Operator: Our next question comes from the line of John Kernan from TD Cowen. Please proceed.
John Kernan: Good morning Michael, Kristin, David. First question is just on long term operating margin. Previously, you’ve said that you thought you’d get back to the 2019 operating margin of 9.4% within the next few years. Can you just talk to the path for getting back to those levels? I just have a follow-up after that.
Michael O’Sullivan: Yes, good morning John. That’s a good question. Once we get through 2023, we plan to provide an update on our long range financial plan, and that will include a multi-year forecast for operating margin. Frankly, for that update to have credibility, we have to get through 2023 first; but in the interim and to try and answer your question, let me offer up some comments to illustrate what kind of things might be in that plan and how are we thinking about operating margin. I’ll start with the data. Our operating margin in 2022 was 430 basis points below our 2019 levels. You can break out that variance into four main components, four main buckets. Firstly, merchandise margin – now, merchandise margin in 2022 was actually about 50 basis points higher than it was in 2019, and that was driven by a higher mix of off-price merchandise and faster, much faster inventory turns.
The environment in 2022, as we said, was very promotional, and that meant that we really had to sharpen our values, and that negatively impacted merchandise margin in 2022. In fact, not to confuse everyone, but although our merchant margin was up 50 basis points in 2022 versus 2019, it actually fell by about 110 basis points versus 2021. We look at that set of numbers and we think there’s upside to margin over the next couple of years, and we believe we have an opportunity to get back closer to the 2021 levels. Now that said, and Kristin emphasized this point, in the near term we want to be very careful about how aggressively we go after that. As we’ve said on this call, our priority in 2023 is really to drive sales rather than to maximize margin.
