Sheamus Toal: Yes, Jim, I’ll take that. I think it’s probably easiest to look at it in Q3, what changes in Q4 and then how it continues to evolve as we move on. So I think first in Q3, I think our biggest impact during the quarter was clearly the issues that I just described. As I bucket those I would say that the change in order economics and the delayed contract savings, each were about a third of the impact, give or take, of what we experienced in terms of margin pressure. The labor and the third-party utilization, I almost combine because they’re both increasing our average transactional cost to process an order. And those two combined represents about the other third, and they’re both pretty equal in terms of their impact.
As we move into Q4, some of those start to reduce in terms of pressure. I think the contractual savings, we will start to see some of that. So I think we’re anticipating some of that pressure to alleviate in Q4. I would say the order economics is probably something that we envision in the near term, given the macro environment being pretty similar in Q4. And then the wage rates, we’ve definitely factored that into our guidance and expectations, but that will start to get alleviated in terms of the incentives and some of those things. As we move beyond Q4, I would think the vast majority of these as we get to peak next year and back-to-school, other than perhaps just the generic wage rate increases that we implemented in the competitive environment that we’re operating our DC in, other than those, I would think that the overtime issues, the higher shift to our third-party provider, the order economics and the contractual savings will all be solved by the time we get to peak in summer next year.
Operator: Thank you. Our next question will come from Jay Sole with UBS. Please go ahead.
Jay Sole : Great. Thank you so much. Maybe, Sheamus, can you just give us — elaborate a little bit more on the free cash flow outlook for the year and sort of debt pay down plans? And there was an 8-K earlier in the quarter where you talked about a covenant issue, like a calculation. Can you just tell us about how that debt covenant calculation is done and where it stands today based on your current guidance? Thank you.
Sheamus Toal: Yes, Jay. I’ll be happy to walk you through it. So I think just taking a step back first to the last part of your question, obviously, earlier this year, in June, we expanded our credit facility. As part of that expansion of the credit facility there was an entirely new borrowing base calculation that was set up. Our covenants maintained pretty — or identical to what they were previously, but there was a new borrowing base calculation that was changed in that expansion of the credit facility. Unfortunately, as part of that expansion, there were some communication issues between us and our agent, the lead bank, in terms of exactly what that new format should look like and what we should be putting in, in terms of the information.
And there was a totally inadvertent glitch in terms of the information that we put in, which for a short period of time, caused us to trip a covenant in June for, as I said, a short period of time, but in July, August, September, we were not in any issue with that covenant. Once it was determined and we identified that, we quickly worked with the banking partners to one, correct that inadvertent issue, waive any violation that would have created, so to get that totally behind us and agreed as part of that to give the bank obviously, some extra reporting. So I think that’s a nonissue for us and totally behind us at this point. And it does not change in any way the covenant calculations going forward. So they’re exactly the same as they’ve always been under the deal.
I think in terms of the first part of your question, we continue to march towards the strategy that we laid out earlier this year. We’ve been extremely successful in reducing inventory as part of this quarter. We exceeded our inventory reductions plan given the tight controls that we put on purchases and also the strong top line growth that exceeded our expectations. So we came in with inventory down about 16%, which was stronger than we had guided to. I think obviously, the expense challenges in terms of distribution and fulfillment did provide some pressure in terms of cash during the quarter, in terms of hitting our targets that we had originally laid out. But as we progress through the back half of the year, and Q4, completing Q4, we’re continuing to expect significant inventory reductions, ending the year with inventories down double digits versus the prior year.
And as part of that, we will see a significant reduction in debt levels from where we are today. So as that inventory declines we would expect debt levels from where we are today to decline in the neighborhood of $100 million or more. So given the results for Q3 and Q4, it’s a little bit lower than we had originally expected, but we continue to march towards our strategy of reducing debt, which we believe positions us better for future success as we move into 2024.
Operator: Thank you. Our next question will come from Marni Shapiro with Retail Tracker. Please go ahead.
