Michael Baker: Yes, it really does.
Operator: Thank you one moment for our next question. We have a question from Jeremy Hamblin with Craig-Hallum Capital Group.
Jeremy Hamblin: Thanks and congrats on the strong Q2 results. First, I just wanted to start with a clarifying question on the gross margin. So, you did a 49.5% gross margin in the first half of the year. I think, Peter, your guide and suggestion that’s implied would suggest like back half of the year average is about 48.5%. So, I know on a relative year-over-year basis, that’s better than what you saw in the first half of the year. But on an absolute basis, the second half, I just want to make sure that’s projected in about 48.5% range. Is that correct?
Peter Stratton: Yes. I mean so that’s right, Jeremy. Overall, it should be about 100 basis points down from last year, which I think we were 49.9% last year. So for some of those reasons I highlighted for — on the previous question, we do expect some improvement in the second half of the year, yes.
Jeremy Hamblin: Okay. And then let’s focus on the future growth strategy because you went through a few things here, and I know that, that plan is still being developed. But I just wanted to make sure that I heard some of the things correct. It sounded like you were planning maybe to invest 3% to 4% of sales in improving brand awareness and that kind of certainly at least FY ’24 and maybe FY ’25, we should be thinking about EBITDA margins that are under 10%. Did I hear that correctly?
Harvey Kanter: Yes. Conceptually, what we hope and envision is that we will invest in marketing. Part of that investment will be leveraged to the P&L through greater sales, and clearly, at least on the onset, part of that marketing will be SG&A increases and affect the P&L in the short term. When we think about this, and it may be a little hard as a public company, but in reality, we need to invest in this business we clearly understand what’s important to the consumer. We clearly have a positioning that’s really important to him based on his terms, and we need to get that message out. And the only way to grow sales is to grow share of market and the other way to create share of market is share of voice. So yes, you heard it correctly. But in time, we absolutely, Jeremy, expect leverage and to grow the top line meaningfully greater.
Peter Stratton: And Jeremy, the only thing that I would add to Harvey’s question is — so yes, any investment in marketing, incremental investment, if we go from 6% to 9%, and that’s 3% more on a 12% EBITDA margin. You’re down to 9% doing real simple math, but that’s assuming that you’re not growing the sales base at all. And I think our hope is that there’s going to be some return from that sale, certainly that investment. Certainly, it will come the longer you go out. But I think there is some hope and expectation that once we start making that investment, we’ll start to see small rates of growth.
Jeremy Hamblin: For sure. How — in terms of that stuff always takes some time. I think that your advertising budget for this year is in the $30 million to $35 million range. So, I think, again, just a quick math here. You’re looking at maybe $15 million to $20 million increase for next year. Is there — obviously, you need to give an initiative like this time, which presumably is at least the next 12 months. Is there kind of a target here over, let’s say, a three-year period where you think sales can be at x is that x is like $700 million Or can you give us a sense of what you think that incremental investment can result in?
Harvey Kanter: Yes, it’s Harvey. The way we’ve characterized it, and I’m going to be cautious because I don’t want to give out competitive insights for lack of a better way to say it. But you should expect to see heightened advertising in very specific ways that are oriented around the positioning and the brand, and that will take some time — and it’s not “going to be more SEM digital marketing.” And hopefully, you can kind of connect more broad-based, but yet still targeted media communication. And the expectation, which we communicated in our previously communicated comments on this call were that we would expect to see low double-digit growth sustainable for some period of time when that advertising is queued up and engage in the consumer.
So your reference without specifically giving a number of $700 million from a $550 million base in change on multiple years stack double-digit growth plus the new store openings plus comp performance, which we’ve previously talked about being better than average remember. I’ll remind you, we typically think that a good consumer retail business will run comps of one or two points. We would expect to be north of that — and the digital business has historically operated between, let’s say, 10% and 15% growth rates for quite some time, barring the pandemic challenges and volatility, we would expect to be north of that — so you have a comp base that is pretty significant, 3% plus in stores, 15% plus online, and then you add to it new share of voice and new market and you would ultimately get to growth rates that are double digit.
We’ve characterized it as low double digit, but you may characterize the growth company differently than us, but we believe a growth company would be meaningful growth and we’ve characterized that as low double digit.
Jeremy Hamblin: That’s super helpful color. And certainly, low double-digit growth that’s for sure, a growth company in retail and…
Harvey Kanter: The only other thing, Jeremy, I just want to caution you, as I said, without sharing competitive intelligence for [LIBOR] ways that, that double-digit growth at low double-digit, over time, we expect to see those years back to back to back. The question will be really when is that fully queued up. And we’re certainly not going to make that investment given the last four months of this year. So one would expect you’ll see greater investment in 2024 and over 2024, 2025 sales ramp and then hopefully continue to maintain that level of increased low double-digit performance.
Jeremy Hamblin: No, understood. Clearly, it doesn’t happen overnight. I wanted to just get a little bit of color, Peter, Harvey on the on the unit growth, and thank you for the additional color on that for outlining what next year would look like. In terms of the cadence on the 10 openings for next year, at this point in time, can you provide a little color on is that likely to be more back half of the year loaded? I’m not sure what your — kind of your lease commitments and your real estate teams are projecting in terms of thinking about how that might play out in 2024?
Peter Stratton: Sure. So just a little color on that. As we mentioned, we’ve got the first three are opening this fall, which we’re really excited about. For the 10 next year, we have seven that we’ve identified. We don’t have leases signed yet, but we have seven that we feel good about. Some of those will open in the first half — some will open in the second half, but it’s not like they will all be — we don’t expect that they will all be back loaded into third and fourth quarter. There’ll be some there. But I would expect maybe four in the first half, six in the second half, something like that.
Jeremy Hamblin: Got it. That is helpful color. I’ll hop out of the queue, but congrats and best wishes.
Harvey Kanter: Thanks Jeremy.
Operator: Our next question will come from Raphi Savitz with RYS.
Raphi Savitz: Maybe one bigger picture question for Harvey and then a couple of quick financial questions for Peter. Harvey, how do you think about kind of the longer-term impact on the business from kind of the new class of weight loss drugs, especially as they become more available, lower cost and maybe in a pill form kind of over time?
Harvey Kanter: Yes, Raphi, great question. It’s actually been the number one question I kid you not on every investor call for the last 90 days. We actually think it is potentially a catalyst for our business. it’s unfortunate, and I say that it’s unfortunate because although those drugs are absolutely helping and we’ve heard about great stories, if you’re 5x you have the potential to become a 3x, but you’re not going to move from a 5x to a large. If you’re at 3x, you’re going to maybe move to a 1x. So there is, first of all, a catalyst for as you diet and lose weight, you need new close. The other part that is interesting, and I’m not sure it’s unfortunate it just what it is, it really requires lifestyle change. And so, I don’t think anyone intends to be on that drug forever.
