Scott Bowman: Yeah.
Michael Egeck: Yeah. Go ahead, Scott.
Scott Bowman: Yeah, I can start off on the gross margin side and Mike can chime in on the sales side. And a lot of that is driven by just our commentary around discretionary purchases, still constrained, interest rate is still high, especially in the hot tub business, very high ticket items. And so, we just haven’t really seen a ton of relief yet from the consumer side. And their ability to ratchet up discretionary purchases, that may happen. We haven’t seen meaningful signs of that yet. And so, we’re kind of taking it with kind of knowledge that we have today. As we look at gross margin, we feel like we’ll recover the lion’s share of the inventory adjustments that we saw come through in Q4. So, that is kind of a Q4 benefit.
If we kind of fix that problem, we should see a big improvement in Q4. And we fully expect to see that. We do have a couple of other headwinds as well. We’ve talked about in the chemical price reductions that we took back in June, which was needed just to get our pricing kind of in-line where it needed to be. And so, as we kind of roll into the New Year, we’ll see some impacts of that. We did take some prices up in January of last year. So, kind of, coming into Q2, that’ll be a little bit even more of an impact. Q1 will be an impact as well. But we’ll also have — with lower sales, we’ll have some pretty significant deleverage on occupancy as well. So, we feel like the gross margin will get better as the year goes on. But in the first-half of the year, it will be a constrained.
Simeon Gutman: Thank you.
Michael Egeck: Simeon, a little more color on, yeah, a little more color on the sales guidance. The — we are planning transactions positive plus 3% at the midpoint. We have seen a recovery in traffic. We feel good about our conversion rates and we feel good about the chemical business, which, as you know, it’s 45%, 50% of our business. And then — and those trends have turned positive. We are, however, planning AOV down 4% at the midpoint. And that really is driven by the mix and a trend we haven’t seen turn yet in discretionary repurchases, hot tubs, above ground pools, and more recently, heaters and robotic APCs. So, that’s how we’re thinking about the business, a recovery and traffic, recovery and transactions, but pressure on the AOV. That’s how we get to the midpoint of the guide.
Simeon Gutman: Yeah. That’s helpful. Thank you.
Operator: Thank you. Our next question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.
Steven Forbes: Good afternoon, Mike, Scott. I wanted to maybe start with the performance of the assets acquired during the past few years. Just trying to get a better understanding of how much of a headwind those newly acquired assets are on both sales and profitability as we look out to 2024 or if you’ve seen some stability to the point where those assets are sort of neutral, right, to sales and profitability? Any context on just how you think through the more recently acquired assets?
Michael Egeck: Yeah. Thanks, Steven. Well if we think specifically about the hot tub businesses and I’ll talk to those first, because as we’ve talked about the big ticket discretionary items often financed, that business has been challenging. We were down for — on a comp basis with the hot tub businesses, 22% for the year. That being said, there is still very good levels of profitability. We feel good about the businesses long-term. And in terms of a mix on our total adjusted EBITDA ratios, they are not a drag on the business.
Steven Forbes: Helpful. And then maybe just a follow up for Mike or for Scott. I think it was Mike, who mentioned the inventory reduction of $100 million from the peak, right, and $50 million at year end. As we think through the guidance here, any help with sort of working capital needs for the first-half of 2024 just as we sort of think through the interest expense implications and free cash flow sort of on a quarterly basis?
Scott Bowman: Yeah. Sure. I can take that one. So, just given the seasonality of our business, we typically start to use our revolver usually in the late first quarter, as we start to execute our inventory build. And so, we kind of see this year playing out in a similar way. And so, as we start to get into the end of this calendar year, we’ll probably be on the revolver. As we ramp-up — usually we ramp-up our inventory late March, early April, that’s kind of when we hit our peak. And then, we may hit, that’s kind of start of the pool season and our peak selling periods, and that’s when we draw the revolver down. And then, the last few months of the year is when we build cash on the balance sheet. And so, we see it happening in a similar kind of way this year.
I think it will play into our benefit, that our peak inventory, at least what we’re planning on. As Mike kind of mentioned, we’ll be close to $100 million less than what we saw this past year. And so, that’s really a testament to kind of the merchandise planning team, and some new tools we have in-place. But we really have a good plan of how we kind get into the season and come out of it. I mean I think we have some other things, kind of, on our side, the supply chain is operating more normalized, lead times are shorter. So, that’s certainly helping us. Our DC team, it’s getting more and more efficient. And so, we feel like that’s how it’s going to play out. And so, from kind of a working capital standpoint, I think one thing to keep in mind is that when we started 2023, we had almost $160 million of payables.
