Savers Value Village, Inc. (NYSE:SVV) Q4 2023 Earnings Call Transcript

Savers Value Village, Inc. (NYSE:SVV) Q4 2023 Earnings Call Transcript March 7, 2024

SVV isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon, and welcome to Savers Value Village’s conference call to discuss Financial Results for the Fourth Quarter, Ending December 30, 2023. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] Please note that this call is being recorded and a replay of this call and related materials will be available on the Company’s Investor Relations website. The comments made during this call and the Q&A that follows, are copyrighted by the Company, and cannot be reproduced without written authorization from the Company. Certain comments made during this call will constitute forward-looking statements which are subject to significant risks and uncertainties that could cause the Company’s actual results to differ materially from expectations or historical performance.

Please review the disclosure on forward-looking statements included in the company’s earnings release and filings with SEC for a discussion on those risks and uncertainties. Please be advised that statements are current only as of the date of this call. And while the company may choose to update these statements in the future, it is under no obligation to do so unless required by applicable law or regulation. The company may also discuss certain non-GAAP financial measures. A reconciliation of each of these non-GAAP measures to their most directly comparable GAAP financial measure can be found in today’s earnings release and SEC filings. Joining from management on today’s call are Mark Walsh, Chief Executive Officer; Jay Stasz, Chief Financial Officer; and Jubran Tanious, President and COO.

Mr. Walsh, you may go ahead, sir.

Mark Walsh: Thank you for joining us today and for your interest in Savers Value Village. We finished 2023 on a strong note, and are pleased with the underlying performance and resiliency of our business. In the fourth quarter, cost and currency net sales increased 4.5%, comparable store sales increased 2.6%, and we grew adjusted EBITDA to $83 million. We believe our results, once again, demonstrate the power of our vertically integrated model which allows us to align our processing levels with demand levels to generate strong profitability and cash flow. As we have previously discussed, unseasonably warm temperatures created some softness in the demand for apparel in the first-half of the fourth quarter. This reversed as the quarter progressed, with trends getting progressively better.

The fourth quarter capped off a very important year for Savers, and one in which we generated strong financial results while continuing to invest in people, processes, and technology to drive productivity, and position us for accelerated growth. We are proud of our achievements in 2023, which included $1.5 billion in revenue, and over $322 million in adjusted EBITDA, $175 million of cash from operations, the opening of 12 new stores, the growth of our customer loyalty program to over five million members, the completion of our self-check-out and in-store signage rollout, the opening of three centralized processing centers, including the first two in the United States, and, of course, the completion of our initial public offering, all while diverting hundreds of millions of pounds of our usable goods away from North American landfills.

Fueled by strong secular trends, the reuse economy and thrifting community are growing. And this is driving strong donation volumes, an increasingly diverse customer base for Savers. We recently completed our latest thrift industry survey, and the results continue to demonstrate the growing popularity of thrift. In the past year, nearly 90% of consumers have engaged in the thrift cycle of the shopper, donor, or both. One in four consumers report they have or will increase their spend at thrift stores citing a variety of reasons, including value, fun, and a unique sense of style, six in 10 Gen Z consumers day that more than a quarter of their wardrobe is second-hand. Ultimately, consumers are more focused on value, quality, and their unique style than they were a few years ago.

With a 70-year operating history and a business that is 10 times larger than our next largest for-profit thrift competitor, we are using our size and scale to further differentiate ourselves in a fragmented industry that historically lacked innovation. Thrifters want to well-merchandized mix of value and selection in a brick-and-mortar setting. To that end, our stores are conveniently located, bright, well-organized, and easy to shop. We turn our inventory over 15 times a year, with an average store putting out 35,000 new items on the floor every week. And we continue to drive supply through conveniently located and efficient donation locations. With the investments we have made over the last few years, the demonstrated margin stability of our business, and our strong unit economics, we are well-positioned to accelerate our growth, whether organically or through acquisition, our number one growth initiative is to expand our store base.

We will stay disciplined and grow our store footprint at the right pace, in locations where we have done the analysis, from both a donor and a shopper standpoint. In 2023, we began our multiyear plan to accelerate unit growth, and we opened 12 new stores. This year, we plan to open up 22 new stores. And in 2025, and beyond, we will plan to expand our unit growth even further to reach the high single-digit percentage range. The new store classes of 2022 and 2023 are performing well, in line with our expectations. And we are building a robust pipeline of future stores. With exceptional cash flow generation, we also continue to strengthen our balance sheet, as Jay will detail in a moment. In conclusion, Savers delivered strong fourth quarter and full-year results.

And we feel good about the underlying fundamentals of our business. While the macro environment remains a bit uncertain, and consumers continue to manage their discretionary spending, our average unit retail of around $5.00, offers an exceptional value proposition that positions us well. I want to thank our dedicated and hardworking team members who execute the business and serve our customers every day. Our mission is to grow the reuse economy, and make second-hand second nature, thereby benefiting people, planet, and profit. With that, I will turn the call over to Jay to discuss our financial results. Jay?

Jay Stasz: Thanks, Mark. We are very pleased with the underlying trends in our results in the fourth quarter and full-year. As Mark mentioned and we previously reported, we saw some early impact from weather, but demand trends accelerated as the quarter progressed, and the month of December was very strong. We managed our processing levels accordingly, and delivered better-than-expected sales and adjusted EBITDA. Let me take you through our fourth quarter results. Net sales increased 4.4% to $382.8 million. On a constant currency basis, net sales increased 4.5%. Our sales growth was driven by a comparable store sales increase of 2.6% in new store openings. Increased transactions drove the comp increase, and the average basket was down very slightly on a consolidated basis.

In the United States, net sales increased 3.9% to $199.5 million. Comparable store sales increased 3.1%. The increase was driven by growth in transactions and, to a lesser extent, basket. In Canada, net sales increased 4.6% to $155.4 million. This included a $600,000 unfavorable impact from foreign currency. Comparable store sales increased 2.0%. The increase was driven by growth in transactions partially offset by a modest decline in average basket. We opened five new stores in the fourth quarter, with three of these in the Unites States, and two in Canada. For the full-year, we opened 12 new stores, in line with our plan. At year-end, we had 326 stores with 155 of these in the U.S., 159 in Canada, and 12 in Australia. Our new stores are ramping well and performing in line with our expectations and our underwriting model.

Cost of merchandise sold as a percentage of net sales decreased 70 basis points to 42%. The 70 basis points decrease was driven primarily by lower material and other processing costs, which was partially offset by higher labor costs. We processed 250 million pounds of goods in the quarter and generated a sales yield of $1.54. This compares with 234 million pounds processed and a sales yield of $1.51 in the fourth quarter last year. On-site and GreenDrop donations represented 71.6% of pounds processed in the quarter versus 71.5% in the year ago quarter. Salaries, wages, and benefits expense increased 21.9% to $90.1 million due entirely from stock-based compensation. Stock-based compensation was $21.6 million in the quarter. Of this amount, $20.8 million related to the IPO.

Excluding the IPO-related stock-based compensation, salaries, wages, and benefits was $69.3 million and declined as a percentage of net sales by 210 basis points to 18.1%. The decline was driven by decreased incentive compensation and productivity improvements from the self-checkout kiosks that we installed primarily in ’22 and ’23, partially offset by an increase in our average wage rates. Our SG&A remains very well controlled. SG&A as a percentage of sales increased 30 basis points to 20.6%, driven primarily from increased credit card fees and IT costs. Depreciation and amortization increased 2.6% to $16.1 million, and interest expense decreased 6.9% to $17.6 million. GAAP net income for the quarter was $43.9 million and included a $31.3 million non-cash tax benefit related to the legal entity consolidation of 2nd Avenue.

Adjusted net income for the fourth quarter was $25.4 million or $0.15 per diluted share compared to $26.9 million or $0.18 per diluted share respectively in last year’s fourth quarter. Adjusted EBITDA increased 5% to $83.1 million, and our adjusted EBITDA margin increased 10 basis points to 21.7%. Turning to the balance sheet, we ended the fourth quarter with $180 million of cash and cash equivalents. For the full year, we generated $175 million of cash from operating activities. At the end of the fourth quarter, our total borrowings outstanding were $817 million, and our net leverage based on a trailing 12-month adjusted EBITDA was 2.0 times. Subsequent to the end of the fourth quarter, we’ve taken additional steps to further strengthen our balance sheet.

First, in late January, we amended our senior secured credit agreement. The amended agreement plus a corresponding upgrade of our debt rating by Moody’s lowers our borrowing rate spread by 175 basis points. Second, in early March, we paid down $49.5 million of principal on our senior secured notes. In addition, we are looking to monetize our interest rate swaps and cross-currency hedges in the coming weeks, which will generate approximately 35 million of cash proceeds, further enhancing our liquidity position. Lastly, let me conclude with some commentary around our initial outlook for 2024. We feel very good about the underlying fundamentals of the business. As Mark mentioned, there is some uncertainty in the overall environment, and consumers continue to manage their discretionary spending, so we think some level of cautiousness in our initial guidance is prudent.

Our January sales were negatively impacted by severe winter weather in some of our key markets, but we’ve seen an acceleration in comp trends through February and early March and are encouraged by the trajectory of our business. Our initial fiscal year 24 outlook is for comparable store sales to increase in the range of 2% to 3% percent, in line with previous communications where you’re planning to open 22 new stores in ’24. Our comp outlook combined with the number and timing of new store openings gets to a full-year revenue outlook of $1.57 billion to $1.59 billion. The continued investment in wages and the higher number of new store openings is expected to put modest pressure on gross margin this year, but most of this is expected to be offset with better leverage over fixed expenses.

As a result, we think both gross margin and total operating expenses as a percent of sales should be flat to slightly down, resulting in adjusted EBITDA margin also being flat to slightly down this year. The last component to highlight around the shaping of our initial ’24 outlook is our vertically integrated model and ability to align processing and labor levels with short-term fluctuations in demand. As we have discussed, this is something that separates us from most other retailers and gives us confidence in achieving our bottom line targets despite the potential for modest and gives us confidence in achieving our bottom line targets despite the potential for modest variability in our top line. As a result, we are initially guiding to a full-year adjusted EBITDA number of $340 million, rather than a range.

A few additional comments to help with the building of models, the timing of our new store openings will be back-end weighted, with approximately three in the first-half, and 19 in the back-half of the year. The first quarter represents our most challenging year-over-year same-store sales comparison, with a 7.2% comp last year that was driven by a 9% comp in Canada, and the 5.6% comp in the U.S. The early portion of this year’s first quarter was impacted by the holiday calendar shift, stores closures, and disruptions from the extreme weather in January. We estimate the weather disruptions in January and holiday calendar shifts will be an, approximately, 150 basis point headwind in the first quarter comparable store sales growth. Similar to what we saw in the fourth quarter, we have seen increasingly positive trends as the quarter has progressed, and March is typically our largest volume month of the quarter.

Given the strong comparable store sales growth in last year’s first quarter, negative impacts from January weather and the holiday calendar shifts this year, we would expect first quarter comparable store sales of approximately 0% to 1%, net sales of approximately $350 million to $355 million, and adjusted EBITDA of approximately $60 million to $61 million. As a reminder, our year-over-year quarterly same-store sales comparisons get progressively easier as the year progresses. The amendment of our credit agreement, in late January, and paydown of $49.5 million of debt, in early March, is expected to reduce our annual interest expense by approximately $10 million. This annual savings will be partially offset by increased interest expense associated with the expected monetization of our IR swaps.

As a result, we are projecting interest expense of approximately $78 million for the year. Lastly, our GAAP net income guidance assumes an effective tax rate of 31%. That concludes our prepared remarks. We would now like to open the call for questions.

See also 50 Best Countries in the World and 16 Longest Lasting Jeans Brands of 2024.

Q&A Session

Operator: Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question is from Matthew Boss from J.P. Morgan. Please ask your question.

Matthew Boss: So, maybe two-part question for Mark. Maybe could you just elaborate on the cadence of sales trends that you’ve seen post holiday, looking at January, February, and then March, to date, or is there just any way to parse out underlying trends that you’re seeing in the U.S. and Canada? And then just, if you could walk through second-half drivers that support same-store sales improvement beyond the first quarter?

Mark Walsh: Hey, Matt, thanks for the question. As we look at the first quarter, it certainly was eventful, as Jay’s reported comments articulate. And we were up against a pretty difficult 7.2 enterprise comp and a 9 comp in Canada. In January, our costs came under significant pressure from weather-related closures and disruptions. It was 140 increase in store impairment days. So, over 1,200 store impairment days versus just 511 last year. Comps do get easier in March. We like the trends that we’ve seen since the significant impact of January. And then I think we’re being smartly conservative in terms of our guidance of flat to 1 for the quarter, as we see that two-year stack in line with the fourth quarter for both U.S. and Canada.

And given the early quarter challenges, we also feel really good about the comp guidance while leveraging our vertically integrated model to guide to that $60 million to $61 million EBITDA target for the first quarter. With respect to your second quarter on what’s going to drive second-half trends, I think we just see a normalization of the patterns that we saw in the late fourth quarter, and what we’re seeing into early March. And we’ve got the same cadence in terms of marketing, as well as strengthening our fundamentals of both supply and demand. And ultimately, well, the comps do get easier as we go through the year.

Matthew Boss: Great. And then maybe Jay for a follow-up on the bottom line, as we break down the adjusted EBITDA margin guide for the year, how best to think about puts and takes on the gross margin line, and just your comfort with inventories coming out of the year, just your comfort with inventory on hand?

Jay Stasz: Yes, sure, Matt. From an inventory standpoint, I’ll take that one first. I mean that is good news because it is an indication of our great supply. So, certainly, the inventory year-over-year has increased. But again, we’ve seen nice trends in our on-site donations, which is a big driver of that. And then in terms of margin for ’24, thinking about that, right, obviously we have a little bit of pressure that could impact our gross margin year-over-year as we ramp the new stores. When I break it down, we expect the gross margin to be flat to slightly down year-over-year. We will have slight increases in our used material costs, but we can mitigate some of that with increasing OSD penetration. And on the production labor side, again, we’re investing in the staff.

So, we will have increases there, but we’re able to offset that with some processing efficiencies that we would expect from our — the labor. So, we mitigate some of that, and that ultimately then leads to a flat gross margin, or slightly down.

Matthew Boss: Great color. Best of luck. Thank you.

Mark Walsh: Thanks, Matt.

Operator: Thank you. Your next question is from Randy Konik from Jefferies. Please ask your question.

Randy Konik: Hey, guys, good afternoon. Maybe I just want to start on the real estate opening timing just to give us some color on what’s driving the more of the back-half weighting? And then can you give us any perspective on how you’re thinking about leases for ’25, are you starting to look for real estate there? Just trying to get a sense of the pipeline?

Jubran Tanious: Yes, hey, Randy, it’s Jubran. Absolutely. So, 2024, as Mark and Jay talked about, we committed to 22, we feel very, very good about that. You’re absolutely right, it is back-end loaded. And a lot of that is because it’s a function of building up the new store opening muscle that we have been working hard at, really, over the last year. And every aspect that goes into opening new stores, we have built up in terms of people, process, technology, the number of dealmakers that we have, the technology platforms that we have, the marketing ourselves to brokers and landlords, and developers. And I think I’ve stated on previous calls a very positive response that we’re getting from national landlord. So, what you’re seeing in 2024 is the outcome of building up that muscle.

Once we get into the back-half of Q2, now we’re in a steady-state position, where we start to see stores that are opening in a more balanced way across all four quarters as we get into 2025. And so, to your question about how are the early stages of 2025 shaping up; very positive. In fact, I would tell you we are already sitting on a handful of signed leases, with more to come for Q1 of 2025, Q2 of 2025, and there’ll be many more to come after that. So, feel great, obviously, about the 22 this year. We feel great about the ’25 next year. In fact, I can tell you we’re ahead of the curve on that. But I go back to what Mark said, we’re not limiting ourselves. We can go faster we will, but we put a premium on execution and replicability. And when we look at the performance of the new stores that we have had over the last one to two years, all of them performing in line with expectations across different markets.

And that just gives us tremendous confidence that our formula is working.

Randy Konik: Great, helpful. And then I guess one last question, more for probably Jay. When we think about the complexion of comp guidance — annual comp guidance for this year, is it just basically assuming it’s all from just traffic versus a mixture of mostly traffic and some ticket? Just want to understand your thoughts there. And then as we think about this model as a model you would want to model over a multiyear timeframe, do you think that this type of comp guidance is the — that the comp guidance would be more appropriate for kind of the investor thinking about three years in the business or is three to four more likely in your opinion, and this year is more subdued because of the comparison? So, just want to get some perspective there as well. Thanks.