So certainly there are some items within our planned private-label assortment that will be more commodity-based. They’ll be in the stores all the time, and like I said, they’ll offer better value. And in some cases, it’ll be, well, really in all cases, high-quality items. And so there’ll be — certainly be an enhancement there. And then the treasure hunt aspect of our business is a really important one. We do intend to have a treasure hunt component to the private label assortment. There is lots of different ways to do that. Seasonal products certainly lend themselves to that, being in and out of those items as the seasons come and go. And then just on a regular everyday basis, we look forward to having the treasure hunt element be a part of the assortment there as well, where we are pulsing in and out of items and creating that newness and excitement within private label, the same that exists within the branded side from an opportunistic standpoint.
John Heinbockel: Thank you.
RJ Sheedy: Thanks, John.
Operator: The next question comes from Jeremy Hamblin with Craig-Hallum. Please proceed.
Jeremy Hamblin: Thanks for taking the questions. Sorry, but I want to come back to the commission support and what the range of impact is in Q2. I wasn’t sure if that was the $12.4 million is what you’re embedded in your guidance. That’s part one. Part two is just the cumulative effect over the course now of four quarters, which I think sounds like it’s more than $50 million. But wanted to see if you could quantify the cumulative effect of kind of the systems update issues. And then lastly, related to this is, if you’re looking for physicals inventories, it’s kind of completing the process here and adjustments. Is there a risk that, when that comes back by the end of June, that it could be worse than what you had embedded here in your guidance?
Lindsay Gray: Yes. Hi, Jeremy. This is Lindsay, I can take those questions. So first, your question on commission support, so happy to quantify those. So the impact overall for Q1 for us, for these system issues was approximately $24 million, and about half of that is commission support for our operators. That’s the $12.4 million that I mentioned –we mentioned earlier. For Q2 for our guide, we’re estimating about a $9 million impact from the systems transitions overall. And about, again half of that will be this kind of trailing off of commission support. Now that margin protection has ended, now that operator protection has ended. Overall, and we’ve quantified this over the last few quarters, overall, the impact that the systems transition has had on us is about $65 million. And about half of that is the operator commission support.
RJ Sheedy: And the physical inventories?
Lindsay Gray: Yep. And then the physical inventory question that you had. So we track these daily as they’re taking place and we’re monitoring the results every day. And so our forecast for the commission support in Q2, we feel is pretty good estimate just because we’re tracking these daily and we’re keeping on top of the results we’re seeing coming in from the stores. So we feel pretty good about the numbers that we baked into the Q2 guide.
Jeremy Hamblin: Got it. Thanks for the color. Best wishes.
Lindsay Gray: Thank you.
RJ Sheedy: Thanks, Jeremy.
Operator: The next question comes from Leah Jordan with Goldman Sachs. Please proceed.
Leah Jordan: I just wanted to see if you could help us understand why your comp guide is going up but your net sales guide is staying the same. Is this just a knock-on impact from the UGO stores or is there any change in your expectation for new store performance?
Lindsay Gray: Hi Leah, this is Lindsay. So it’s truly just due to rounding, nothing that’s changed within our guidance.
Leah Jordan: Okay, that’s helpful. Thank you. And then I just wanted to go back to the IO pipeline discussion. It sounds like things are tracking for your new store growth to get back to 10% in ’25. That’ll be a big step up on new stores, plus you have the transition of the UGO stores as well. So just a bigger step up in IO needs next year. And given the timeline with the training that they need, have all of the IOs been selected at this point, where are you in that process? And any color on the background and quality of those would be helpful as well.
RJ Sheedy: Yes. Hi Leah, we know they’ve not all been selected, so think about the lead time for IO recruiting and training as being about a year. It can flex, be shorter in some cases, and — or longer in other cases. And that we manage that in parallel with the real estate pipeline. So we think about and why we think about and we always manage to good healthy growth rate. We’re mindful of not growing too fast in large part because of the operator pipeline and making sure we get qualified people in there running the stores. We’re in a great position to do that for next year. We continue to recruit for the stores that we plan to open, for any that we might take advantage opportunistically that adds to the current pipeline. We’ve got the lead time in front of us still to do that.
In terms of quality, I think your question was for incoming operators. It’s a big part of both the recruiting and training process. Really important that we’re recruiting high-quality operators to come in and that we set them up for success. We have a very rigorous multistep process from a recruiting standpoint. We need to make sure it’s the right fit for them and certainly the right fit for us. And then there’s another important part of the process when they come in and they’re in training, not everyone makes it through training. There is a healthy percentage of attrition that happens in training and that’s important to make sure, again that the fit is right and that the capabilities are there for anything that maybe wasn’t identified in the recruiting process.
And so that gets us to then when they are ready to apply for this store. I’d say the third filter, an important one, is that we select the right fit for the store, for the right community — for the community that they’re going into, and for what the operator is looking for, certainly in terms of where to live and what type of store to operate, because we do have stores across all different types of markets.
Leah Jordan: Very helpful. Thank you.
RJ Sheedy: Thanks, Leah.
Operator: The next question comes from Simeon Gutman with Morgan Stanley. Please proceed with the question.
Simeon Gutman: Hi, everyone. Also a follow-up on the gross margin and the systems issues. The prior quarters’ gross margin went up a bunch, and now there is this give back. You were still going through integration and systems issues while the gross went up. What was discovered or new in this period that was different from the prior? And then besides obviously the cost of inventory being higher, was there any other costs that are being run through gross margin, that are run through gross margin, that are not explicit product cost? There is other labor that’s tied to it.
RJ Sheedy: Hi, Simeon. For the first quarter, this additional 110 basis point impact, we identified this on the back end of the quarter. It was quantified during catch-up invoice processing and margin reconciliation. So we had some delayed payment processes due to the new systems. But really the main cause was limited data visibility for how we manage and forecast margin. It was a bigger issue in the first quarter than it was in the fourth quarter because of the amount of time that we’ve been managing the business with limited data. Think about last year as we implemented the new systems, we had inventory already in the system, in the warehouse, and the stores. We had POs written with product landing that carried forward really into — well into the fourth quarter and resulted in the margin that we reported.
We’re a data-driven organization. Margin visibility is especially important for an opportunistic model like ours. We’re negotiating costs, we’re setting prices, we’re managing gross margin daily, and we’re constantly balancing retails with value margin, along with the volume decisions that we make, how much we choose to buy relative to other items that are in the assortment. And all that comes back to how we negotiate costs with our suppliers. So it’s a very dynamic margin management approach that we take. It’s a unique characteristic of our model. It’s a strength, quite frankly. It’s enabled us to deliver consistently steady and strong margins. Throughout our entire history, we’ve discussed it as one of the ways we uniquely manage healthy margin during inflationary time periods.
And so, therefore, data and tools are critical for how dynamic the decision-making is, both for us and then for operators. As I mentioned, they use tools and data as well to manage margin in a very dynamic way at the store level. And so what’s happened here is we got off track. In the first quarter, we’ve had limited visibility until just recently, and so we lost track of where margin was trending. The good news is that we were able to bring that back once we identified exactly where we were and for the work that we’ve been doing. That happened several weeks ago and the recovery has already begun. So we’ve been able to, and I’m talking down at the sub-class, class department level for how we manage margins, able to strike that right balance between value and margin for the business with the right information on a weekly basis, where it hasn’t been there or it’s been more limited as far as those operating metrics go to help us make those decisions.
And again, buying the fundamentals are healthy. So this is really about getting back to better margin management or the normal margin management that we’ve always had in this business. And with the increased visibility that we brought online recently, we’ve been able to do that.
Simeon Gutman: If I — can I just sneak a follow-up related to that. Please go ahead.
Lindsay Gray: Sorry, I was just going to answer the second part of your question, just other costs and gross margin. So gross margin, as we’ve always had, includes product costs and all the costs that we incur to get product to the store. So that’s always included distribution costs as well.
RJ Sheedy: But not an impact to — as far as the margin pressures here. They’ve been specific to the systems issues. There are other costs or higher costs than some of these other components.
