Rupesh Parikh: Great. Thank you. I’ll pass it on.
Operator: Thank you. One moment for our next question and our next question comes from the line of Edward Kelly from Wells Fargo. Your question please?
Unidentified Analyst: Yeah. Hey, good morning, guys, it’s Anthony on for Ed here. Thanks for taking our question. I just wanted to dig in on the Q4 guidance a little bit. It looks like it implies continued softness in margins. I’m getting something like 20 bips to 30 bips of EBIT margin compression at the midpoint, I guess, one, do you guys agree with that? And then two, can you just dig in a little more on what’s driving that assumption and the different puts and takes, just across gross margin and SG&A?
Chip Molloy: Yeah, well on the gross side will probably be flattish to, similar to this quarter, maybe down just to error. And then there’ll be some delivered de-leverage on SG&A as we implied all year, the back half was going to be some deleverage on SG&A, but what’s causing that again is as again, we’ve had a really back half loaded new store growth here. That bubble’s coming through and we’ve got some wage increases that we’re working through.
Unidentified Analyst: Okay. And then just on inflation, I guess, are you still contemplating inflation in that mid-single digit range for Q4? And then any early reads in terms of how we should be thinking about ‘24?
Jack Sinclair: As it relates to inflation, we had said on the last call that we expected for the back half to be low to mid-single digits, and that was an average for the whole half. So that’s been coming down year over year that that inflation rate driven is, is a year over year compare. And that is coming down as we expected it. And prices are stabilizing as we expected it, but at the same time, the units per basket is stabilizing as well. So, our expectations as we go into the three comp for Q4 is it’ll feel, it’s getting closer and closer to what I would call normalization. We’ve got — we’re expecting some positive traffic and we’ll still get a little bit of AUR increases from a year over year perspective. And the units will start to be in a very less dilutive environment.
And as that flows through to next year, we feel like at this point, it’s early in the budget stages for us and we don’t have a crystal ball, but the idea that we’re getting to a place of normalcy where it’s about driving a little bit of traffic, you get a little bit of AUR and the teams are working really hard to get a little bit more units in the basket.
Chip Molloy: And the thing that encourages us, Antony, about going into next year is the traffic trends. We’re seeing pretty strong traffic in both bricks and mortars, strong traffic in our e-com business. And it kind of gives us confidence that the assortment that we’ve been putting together has got differentiation. So, the context of the marketplace that chipped out lines, I think is bang on. We’re not going to see the level of inflation in 2024 that we’ve seen in the last couple of years. But the unit trend has been encouraging in that sense in that the slow down’s been slowing down and the context that we’re really encouraged about is traffic going into 2024, which should sustain our top-line business going forward.
Operator: And our next question comes from the line of Mark Carden from UBS. Your question, please.
Unidentified Analyst: This is actually Zain for on for Mark. Thanks a lot for taking our questions. Just on the quarter, what have you seen with respect to the consumer behavior through the quarter in light of some of the recent pressures, consumers are facing any change in patterns relative to last quarter? Or is it pretty consistent overall, whether it be UPTs trade down to more affordable options and more private label?
Jack Sinclair : I don’t think we’ve seen any really significant different trend in Q3 than we did across Q1 to beyond the point that chip outlined a little minute ago, which was inflation. The level of inflation is flattening out a little bit. We’re still seeing inflation as we predicted, and the unit change is not slowing down as much. Customers are spending as much money on food and we’re very encouraged by the trends towards our assortment. I think the pandemic drove this a little bit. I think people are trending towards more about immunity, more about attribute-based products, understanding what, and we are seeing that across our portfolio, whether it be plant-based, whether it be grass-fed, those kinds of attribute-based products, keto and paleo and gluten-free.
We’re seeing real strong trends in those spaces and I think that’s been driven by the pandemic as much as anything else. There is a little bit of — has been some trade down in certain places in terms of cuts and meat and that kind of thing, but by and large, the trends in Q3 are in line with what we’ve been seeing. And as I said in the last conversation, we’re encouraged by the traffic trends that are coming in. We think that’s driven by some kind of macro issues around our type of customer, and our target customers that may not be being mirrored in other places.
Unidentified Analyst: Thank you. Appreciate that. And secondly, in the event comp slow next year, I was curious if you would prioritize market share gains or protecting your margins. And also, can you please remind us some of the levers you can pull to manage expenses if comps slow next year?
Chip Molloy: First of all, the context of market share and margin is not the way we think about our business. Our market share, we concern ourselves with the target customer that we have, which remembers only something like $200 billion of the $1.2 trillion marketplace. We are concerned ourselves with the target customer, and growing share of wallet with that target customer. And that’s the entire focus. And the market share that we really pay attention to is the market share of natural and organic, and that’s something that we feel we have got or had a good run on that over the last few years, and we are encouraged by the trends at the moment in that space. So, when you talk about market share, we think it is all about looking after our target customers and being increasingly relevant to them.
And we don’t see a promotional solution or a margin investment solution to do that. The way to do that is to get the right products in the store, deliver in stores, make sure your customer service scores are high. And we are getting some really good scores on that, in terms of looking after the customer and giving them what they want in this target customer environment that we are in. So, we don’t see this dynamic of we are going to have to invest margin to get growth in top-line sales. We talk about how can we look after that target customer better and better. And in terms of efficiency. We have got some opportunities to be more efficient in our business going forward. I mean, there is clearly some wage pressures, which is actually not such a bad thing.
And we will be driving our business to make sure that we get as much of efficiency as we can in terms of the replenishment into our stores, in terms of handling pricing in our stores, in terms of handling our registers, and the checkouts in the stores, there is a number of things that we can do in our distribution centers that we have invested in going forward to and some investments in systems and IT. So, we have got some opportunities to drive some efficiencies going forward, that maybe covers some of the SG&A challenges that we are going to face over the next couple of years.
