Rob Helm: Sure. From a distribution center perspective, when we opened distribution centers, historically, it was, I would say, 50 basis points or lower. However, as we scale, we’re getting further along in terms of the scale of this business. I’d expect, call it, 10 to 20 basis points in the back half of next year, which we should be able to offset with self-help.
Eric van der Valk: Yes, it’s probably important to add that the wage investments, we’ve made to-date are budgeted wage investments included in our guidance assumptions.
Randy Konik: Yes that’s super helpful, that’s what we need. Thanks guys.
Eric van der Valk: Thanks Randy.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Jason Haas from Bank of America. Your question, please.
Jason Haas: Hi. Good morning. And thanks for taking my questions. Can you talk about what the drivers are that get you from the – a little bit over 39% gross margin this year to – it sounds like you expect it could be at 40% next year and beyond. So can you just talk about what those drivers are to get there?
Rob Helm: It’s really a supply chain story. So for this year, the supply chain on a full year basis is closer to 10% of sales, with it being front half loaded and above 10% for the front half, and Q4 being below 10%. As the call back to our algo, we historically did a 7% to 8% supply chain cost. We don’t anticipate that we’ll be able to get back there. We have made the wage investments that we just discussed during the last question that will have an impact. Domestic fuel is still not back to a pre-pandemic level. So that’s a tiny bit of a headwind. But if we get back to the 8.5% to 9% range, that gets us all over the 40% gross margin.
Jason Haas: Got it. That’s great. And then, Rob, another follow-up for you on margins. I think given the strong comp that you reported, I think people maybe thought we’d see a little bit better flow-through on SG&A. It sounds like the big offset was incentive comp. Do I have that right? Is there any other areas that you’ve been investing in that maybe offset some of the flow-through you would have seen on that strong comp?
Rob Helm: No, that’s right. Incentive comp was roughly 40 basis points of pressure. In this model, we would estimate to lever by about 10 basis points for every point of comp over 3%. So, we feel pretty good about it.
Jason Haas: Got it. That’s great. That makes sense. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Eric Cohen from Gordon Haskett. Your question, please.
Eric Cohen: Hi. Good morning. Thanks. I just want to follow-up on that last answer. You said that you can get 10 basis points of leverage for – every 100 basis points above a 3% comp. At least historically, it’s been 1% to 2% comp. So just curious what has changed to the 3% now?
Rob Helm: I would say that the leverage point – you’re correct, is closer to, say, two. It was 1.5, but wage investments have increased within SG&A. It’s closer to two.
Eric Cohen: Okay. So, I think in the last what you say – it would be 3%. Is that just for this year? That’s not the new all going forward, then I assume?
Rob Helm: No.
Eric Cohen: Okay. And then just also wanted to ask on – you didn’t comment earlier in the prepared remarks that new stores are producing above plan. But it looks like new store productivity came down this quarter. And just looking at the revised guidance, at the midpoint, sales you raised by 1%, but the comp you raised by 200 basis points. So curious sort of how to reconcile that?
John Swygert: New store productivity was lower than the first quarter as planned. The timing of new store openings impacts that the way that the math is calculated by the analyst community. As a group, we are very happy with our 2023 openings. They’re performing well above plan.
Operator: Does that answer your question?
Eric Cohen: Yes. Thank you.
Operator: Thank you. One moment for our next question. And our next question comes from the line of Jeremy Hamblin from Craig Hallum. Your question, please.
Jeremy Hamblin: Thanks and congrats on the strong results. I wanted to ask about the remodel program. And you talked about 30 to 40 remodels this year. You still have a very strong balance sheet here over $300 million despite some of the buybacks that you’ve done. Just wanted to understand, in terms of capital allocation, you noted that you’re not quite ready to guide to 50 new stores for next year yet, but pipeline is filling up. I wanted to get a sense of the remodel program. Is that something that you think could potentially accelerate? Are you still gaining those nice mid-single-digit sales lift? And is there any change in terms of what the cost of those remodels looks like, which I think previously you talked about $125,000 to $200,000?
Eric van der Valk: Sure. Jeremy, it’s Eric. I’ll answer. We’re very happy with our remodel program to-date, the cost has not changed. It’s still in that range of $125,000 to $200,000. We’re not guiding ’24 like we weren’t guiding on new stores either, but it’s realistic to expect a similar range in terms of what stores will – how many stores we’ll remodel in ’24 as we do in ’23. So it’s in that 30 to 40 range. The customer response has been very, very positive, and we have similar expectations going forward in terms of return on the investment.
Jeremy Hamblin: Great. And then last one for me here. So if you have the Illinois DC rolling out next year, in terms of plans then for after that, what are you looking at in terms of timing for what the next DC might look like? And geographically, how are you thinking about that?
John Swygert: Sure. We’re looking probably several years out for the next DC, three-plus years. We’re going to sweat the assets that we have in place with the four DCs to kind of close to the limit. The location of the DC will be in the West somewhere. So we haven’t determined where, although we’ve done some modeling around it. So we’re preparing for it. We haven’t determined exactly where on the map it will be, but somewhere in the West. And Jeremy, one takeaway that we don’t normally talk about too much is the DC – two of our DCs that we do have, we’ll have Illinois and Texas. They’re both expandable as well. So, we can add capacity to them just like we did in New York, D.C. So that’s another avenue we have, like Eric said, just sweat that asset so. Operator, we are getting a lot of feedback here. [technical difficulty]
Jeremy Hamblin: Can you speak again?
John Swygert: Hello, can you hear us?
Jeremy Hamblin: Yes. Yes, I mean the over the line. I think it was coming from participant there – question?
Eric van der Valk: Okay. Great. Yes, I was just going to add one small little point, whether it’s a five DC store network – is still something we debate at our full maturity of 1,050 stores.
Operator: Thank you. One moment for our next question. Our next question comes from the line of Matthew Boss from JPMorgan. Your question, please.
