Savers Value Village Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 7, 2024

There are 13 speakers on the call.

Operator

Good afternoon, and welcome to Savers Value Village's Conference Call to discuss Financial Results for the 4th 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 and instructions will follow at that time. 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 and A that follows are copyrighted by the company and cannot be reproduced without written authorization from the company.

Operator

Certain comments made during this call may 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 the SEC for a discussion on these 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.

Operator

A reconciliation of each of these non GAAP measures to the 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 Hubert Tanius, President and COO. Mr. Walsh, you may go ahead, sir.

Speaker 1

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 4th quarter, constant currency net sales increased 4.5%, comparable store sales increased 2.6% and we grew adjusted EBITDA to $83,000,000 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.

Speaker 1

The Q4 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 $1,500,000,000 in revenue and over $322,000,000 in adjusted EBITDA, $175,000,000 of cash from operations the opening of 12 new stores the growth customer loyalty program to over 5,000,000 members, the completion of our self checkout and in store signage rollout, the opening of 3 centralized processing centers, including the first two in the United States, and of course, the completion of our initial public offering, all while diverting 100 of 1,000,000 of pounds of reusable 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 and 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 as a shopper, donor or both.

Speaker 1

1 in 4 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. 6 in 10 Gen Z consumers say that more than a quarter of their wardrobe is secondhand. 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 has historically lacked innovation. Thrifters want a well merchandised mix of value and selection in a brick and mortar setting.

Speaker 1

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.

Speaker 1

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 multi year 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 20222023 are performing well, in line with our expectations and we are building a robust pipeline of future stores.

Speaker 1

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 4th 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 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 secondhand second nature, thereby benefiting people, planet and profit.

Speaker 1

With that, I will turn the call over to Jay to discuss our financial results. Jay?

Speaker 2

Thanks, Mark. We are very pleased with the underlying trends and our results in the Q4 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 4th quarter results.

Speaker 2

Net sales increased 4.4 percent to $382,800,000 On a constant currency basis, net sales increased 4.5%. Our sales growth was driven by a comparable store sales increase of 2.6% and 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% $199,500,000 Comparable store sales increased 3.1%. The increase was driven by growth in transactions and, to a lesser extent, basket.

Speaker 2

In Canada, net sales increased 4.6 percent to $155,400,000 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 5 new stores in the 4th quarter, with 3 of these in the United States and 2 in Canada. For the full year, we opened 12 new stores in line with our plan.

Speaker 2

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%. 70 basis points decrease was driven primarily by lower material and other processing costs, which was partially offset by higher labor costs.

Speaker 2

We processed £250,000,000 of goods in the quarter and generated a sales yield of 1.54 dollars This compares with £234,000,000 processed and a sales yield of $1.51 in the Q4 last year. On-site and green drop donations represented 71.6 percent of pounds processed in the quarter versus 71.5% in the year ago quarter. Salaries, wages and benefits expense increased 21.9 percent to $90,100,000 due entirely from stock based compensation. Stock based compensation was $21,600,000 in the quarter. Of this amount, dollars 20,800,000 related to the IPO.

Speaker 2

Excluding the IPO related stock based compensation, salaries, wages and benefits was $69,300,000 and declined as a percentage of net sales by 2 10 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 2022 and 2023, partially offset by an increase in our average wage rates. Our SG and A remains very well controlled. SG and 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 percent to $16,100,000 and interest expense decreased 6.9 percent to $17,600,000 GAAP net income for the quarter was $43,900,000 and included a $31,300,000 non cash tax benefit related to the legal entity consolidation of Second Avenue.

Speaker 2

Adjusted net income for the Q4 was $25,400,000 or $0.15 per diluted share compared to $26,900,000 or $0.18 per diluted share, respectively, in last year's Q4. Adjusted EBITDA increased 5% to $83,100,000 and our adjusted EBITDA margin increased 10 basis points to 21.7%. Turning to the balance sheet. We ended the 4th quarter with $180,000,000 of cash and cash equivalents. For the full year, we generated $175,000,000 of cash from operating activities.

Speaker 2

At the end of the 4th quarter, our total borrowings outstanding were $817,000,000 and our net leverage based on a trailing 12 month adjusted EBITDA was 2.0 times. Subsequent to the end of the Q4, 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. 2nd, in early March, we paid down $49,500,000 of principal on our senior secured notes.

Speaker 2

In addition, we are looking to monetize our interest rate swaps and cross currency hedges in the coming weeks, which will generate approximately $35,000,000 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.

Speaker 2

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 early March and are encouraged by the trajectory of our business. Our initial fiscal year 'twenty four outlook is for comparable store sales to increase in the range of 2% to 3%. In line with previous communications, we are 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 $1,570,000,000 to $1,590,000,000 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.

Speaker 2

The last component to highlight around the shaping of our initial 2024 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 variability in our top line. As a result, we are initially guiding to a full year adjusted EBITDA number of $340,000,000 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 3 in the first half and 19 in the back half of the year.

Speaker 2

The Q1 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 a 5.6% comp in the U. S. The early portion of this year's Q1 was impacted by the holiday calendar shift and store 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 to 1st quarter comparable store sales growth. Similar to what we saw in the 4th quarter, we've seen increasingly positive trends as the quarter has progressed and March is typically our largest volume month of the quarter.

Speaker 2

Given the strong comparable store sales growth in last year's Q1, negative impacts from January weather and the holiday calendar shifts this year, we would expect 1st quarter comparable store sales of approximately 0% to 1%, net sales of approximately $350,000,000 to $355,000,000 and adjusted EBITDA of approximately $60,000,000 to $61,000,000 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 the pay down of 49 point $5,000,000 of debt in early March is expected to reduce our annual interest expense by approximately $10,000,000 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 $78,000,000 for the year. Lastly, our GAAP net income guidance assumes an effective tax rate of 31%. That concludes our prepared remarks.

Speaker 2

We would now like to open the call for questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer Your first question is from Matthew Boss from JPMorgan. Please ask your question.

Speaker 3

Great. Thanks. So maybe 2 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.

Speaker 3

S. And Canada? And then just if you could walk through second half drivers that support same store sales improvement beyond the Q1?

Speaker 1

Annette, thanks for the question. As we look at the Q1, it certainly wasn't eventful. As Jay's recorded comments articulated, we were up against a pretty difficult 7.2% enterprise comp and a 9% comp in Canada. In January, our comps came under significant pressure from weather related closures and disruptions. It was 140 increase in store impairment days.

Speaker 1

So over 1200 store impairment days versus just 5 11 last year. Comps do get easier in March. We like the trends that we've seen since the significant impact of January. And I think we're being smartly conservative in terms of our guidance of flat to 1 for the quarter as we see that 2 year stack in line with the Q4 for both U. S.

Speaker 1

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 percent to 61 percent EBITDA target for the Q1. With respect to your second question 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 Q4 and what we're seeing into early March. We've got the same cadence in terms of marketing as well as strengthening our fundamentals of both supply and demand. And ultimately, look, the comps do get easier as we go through the year.

Speaker 3

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?

Speaker 2

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.

Speaker 2

And then in terms of margin for 2024, 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.

Speaker 2

So we mitigate some of that and that ultimately then leads to flat gross margin or slightly down. Great color. Best of luck.

Speaker 4

Thank you. Thanks Matt.

Operator

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

Speaker 4

Hey, guys. Good afternoon. Maybe I just

Speaker 5

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 'twenty five? Are you starting to kind of look for real estate there? I'm just trying to get a sense of the pipeline.

Speaker 6

Yes. Hey, Randy, it's Gibran. Yes, absolutely. So 2024, as Mark and Jay talked about, we've committed to 2022. We feel very, very good about that.

Speaker 6

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 deal makers 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 landlords.

Speaker 6

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.

Speaker 6

We feel great about the 25 next year. In fact, we tell you we're ahead of the curve on that. But I go back to what Mark said. We're not limiting ourselves. If we can go faster, we will, but we put a premium on execution and replicatability.

Speaker 6

And when we look at the performance of the new stores that we have had over the last 1 to 2 years, all of them performing in line with expectations across different markets. And that just gives us tremendous confidence that our formula is working.

Speaker 5

Great. Helpful. And then I guess one last question more for probably Jay. When you think about the complexion of comp guidance, annual comp guidance for this year, is it just basically assuming all from just traffic versus a mixture of mostly traffic and some ticket. Just want to understand your thoughts there.

Speaker 5

And then as we think about this kind of model as a model that you would want to model over a multi year timeframe, do you think that this type of comp guidance is the comp guidance that would be more appropriate for kind of an investor thinking out 3 years in the business or is 3 to 4 more likely in your opinion and this year is more subdued because of comparisons? Just want to get some perspective there as well. Thanks.

Speaker 2

Yes, sure, Randy. Thanks for the question. In terms of the composition of the comp on the annual basis, it's a little bit of a tail between the two countries and it reflects what we've seen trends. So in the U. S, I would say that comp would be 2 thirds transactions and then probably 1 third a bit of a lift on average basket.

Speaker 2

And in Canada, it would be primarily driven by transactions with essentially a flat average basket. We do expect that we'll have some modest price increases over the next year. In Canada, what we see is that, that is pretty much offset with the decrease in UPT. In the U. S.

Speaker 2

Though we are seeing some upsides in that and that the average basket is climbing. So that's kind of how we model that for 2024. And then in terms of your question on this year's guide and long term, I mean, we've talked about being appropriately conservative with our comp guidance. We think that's the right position to take, especially now in this current environment, right where there is some economic uncertainty. So if we think about the top end of that range at 3, really a couple of things.

Speaker 2

I mean, again, we think that's appropriately conservative. We think also that sets up the expense structure underlying that comp guide. So that if the demand does pick up, we're in a great position to capitalize that and get some leverage on our expenses. When I think about longer term guidance, I think maintaining this level is appropriate, 2% to 3% range would make sense going forward. And talking about our long term algorithm, right, if we think about long term, really that long term algorithm is combined of our expectation of comp and then our unit growth.

Speaker 2

And as Gibran has talked about, we are starting to ramp our new store growth appropriately. We've got 22 this year. We're planning to do, say 25 next year and then 25 plus in the years beyond that. So we feel very good with that. And with the 2% to 3% comp and that type of unit growth, we definitely build right into our long term algo.

Speaker 2

So we feel very comfortable with that.

Speaker 5

Very helpful. Thank you.

Operator

Thank you. Your next question is from Luke Roach from Goldman Sachs. Please ask your question.

Speaker 7

Thank you. Good afternoon. My question is for Mark. I was hoping you could discuss the traffic driving initiatives that you have in 2024, including marketing and other customer facing initiatives such as loyalty. What are you seeing in terms of new customer acquisition today?

Speaker 7

And what are you expecting for the year?

Speaker 1

Hey, Brooke, thanks for the question. From a loyalty perspective,

Speaker 5

I

Speaker 1

couldn't be more proud of the team and how we're executing new member sign ups. 2023 was a really great year in terms of our growth of our loyalty platform growing over 10% in North America, which really, really strikes to the heart of the team members in the stores converting non members into members. It's more of the same there. I mean, we are staying focused on that initiative. Gibran, Michael Todino and Nicole McPherson, when they're talking to their store leadership, that is a big priority for us as we think about facing off to the consumers that are coming into our environment.

Speaker 1

So more of the same in 2024 when it comes to the loyalty member and the growth of that particular metric. In terms of connecting with our member base, the influencer programs that we put in place are working. We've got great interaction with our customer base. And I'm sure you recall, we've done a lot of surveying to understand what motivates the thrifter to come into the environment and what keeps them coming into savers. And it's about authenticity.

Speaker 1

We're very authentic in terms of how we talk to our thrifters and I think that connection keeps our attrition rates at very, very low level. So when we look at our top cohorts, we have best in class attrition rates being in the low single digits. So we're very pleased with both the member sign ups and our continued interaction with our loyalty members. We believe that that is the status quo for 2024 continuing to move on the positive momentum we've already created in 2023.

Speaker 7

Thanks, Mark. And maybe one for Jay. In response to Randy's question, you mentioned that if demand does pick up, you could get some leverage on your expenses this year. Can you elaborate on what the expense leverage point is for this year and what an additional point of comp might mean for the bottom line? Does that leverage point change as you move through 2024 and into 2025 as you get the first few tranches of new stores through the system and you no longer see the same level of gross margin pressure from some of those new store openings?

Speaker 2

Yes, Brook. The way we think about our leverage point is the comps that exceed inflation levels is where we start to gain some leverage. I mean, obviously, setting up our guidance and our expense structure the way we have, if we see increases in demand, we will get some flow through on that. So yes, and I don't think as we grow, we're going to continue to ramp stores. So as we've talked about overall from an EBITDA margin standpoint, I mean, we're going to we're modeling basically consistent EBITDA margin this year to last year, maybe slightly down, say 10 or 20 basis points.

Speaker 2

And going forward, we would expect to work to maintain that EBITDA margin. We will, as we gain scale and as we get the pipeline as we get past this ramp and new stores start to come in to the store base, right, we get 25% and consistently year after year. We will gain leverage we think on the operating expenses. So that in time once we get past this first initial ramp, we would expect some leverage on EBITDA margin so that we'll grow at say 10 to 20 basis points in the future years.

Speaker 7

Thanks so much. I'll pass it on.

Operator

Thank you. Your next question is from Michael Lasser from UBS. Please ask your question.

Speaker 4

Good morning or good afternoon. Thank you so much for taking my question. So between this Q1 and the last quarter, the business is becoming a bit more volatile. Would you attribute that to any change in the competitive landscape or just any fatigue surrounding the trend towards thrifting that's coming off of the pandemic?

Speaker 1

Michael, this is Mark. Would not describe the business as volatile with respect to the factors that you represented. I mean, we're talking about a weather impact of 1200 store days that's store closures are just part of the business of running a retail business. When we think about fatigue with respect to thrift and thrifting, our recent survey data actually demonstrates the opposite, that 90% of consumers are engaged in thrift as either a shopper or a donor or both. 1 in 4 consumers are going to increase their spending in thrift and that 6 in 10 Gen Z customers have secondhand goods in their closet.

Speaker 1

We see the trend continuing to accelerate. And on the donation side, I will tell you that our on-site donation volume continues to increase in both the U. S. And Canada, which again goes back to that circular economy and the power of this momentum around doing the right thing with used textiles. So quite the opposite in terms of I think the perspective about the secular trend, we actually see it continuing to be very strong.

Speaker 1

And we'll point to especially in January, we'll point to a very volatile weather situation that conspired to just force us to close stores or limit hours in stores in a manner that was significant relative to last year in January.

Speaker 4

Got you. That's helpful. My follow-up question is, what have you assumed for the sale yield that's embedded within the guidance for this year, especially with inventory up so significantly year over year? And are there any indications that you're running up against more pricing constraints with at least in the mind of the consumer? Thank you.

Speaker 6

Yes. Hey, Michael, this is Gibran. So with regard to sales yield, we've enjoyed some pretty robust increases in sales yield over the last several years. We've assumed something a bit more modest for remainder of year on the order of a 3% to 4% increase in sales yield, which in our mind is very achievable for all of the factors that we've talked about in the past. And a reminder for the group, sales yield is sales divided by pounds processed.

Speaker 6

So when we look at matching supply on our sales floor with demand, you start with that denominator, you start with processing the right amount of goods. And as Mark mentioned, we're in a very robust supply situation. So we're in a great spot. When it comes to the sales portion of it, it's all those things that we talk about, quality, quality of goods, particularly associated with robust on-site donation growth, Space to sales, so certainly germane as we think about what the spring transition is going to look like over the next couple of months. As all of you know, we don't do a spring flip in our stores.

Speaker 6

We match what the thrifter is buying in terms of long sleeve, short sleeve, as it's happening with space to sales dashboards that our operators manage the business to. Comparative pricing, back stock, I mean all the things that go into sales, you'll tell us that our assumption of a 3% to 4% for remainder of the year is very achievable.

Speaker 4

Thank you very much, Iluvak. Thank you. Thank you, Michael.

Operator

Thank you. Your next question is from Peter Keith from Piper Sandler. Please ask your question.

Speaker 8

Hey, thanks. Good afternoon, everyone. You guys had touched on the central processing centers. You've got 3 open now. Maybe you could talk about how those are trending?

Speaker 8

Is it looking increasingly like something it could be scaled up to more and more units? And if you could touch also on how the book processing centers are performing?

Speaker 6

Yes. Peter, Gibran, I'll answer a portion of it and you guys can jump in if there's anything additionally. So yes, we are currently operating 3 CPCs in Canada, 2 in the U. S. With a third U.

Speaker 6

S. Location to open in Southern California either the end of this year or early next year. And a reminder, these are long term strategic assets for us that help us unlock growth and overall market performance. And I would tell you that it's all about continuous improvement and we are thrilled month by month with the improvements in efficiency and capacity and throughput that we are seeing in these. So very enthusiastic about CPC.

Speaker 6

And in fact, we'll take it a step further. There's a bit of innovation cascade that has happened here where many of the learnings from CPC, we are able to harness in a bit more nimble, a less capital intensive, almost CPC light version that allows us to do exactly what we talked about before, open up new store locations that traditionally would not have been possible except for the presence of off-site production. So we have a few of these that are operating currently in Canada. We are prospecting to open more. We've got a pro form a algorithm that is very attractive.

Speaker 6

And again, I would think about it in terms of a CPC light where it's a bit more nimble, less capital intensive and still allows us to unlock that new store growth that we talk about.

Speaker 1

Well said, you're Brian. I think on automated book processing, we continue to see the merits of that program continuing. We've got 93 stores that are being served by the automated book processing units that we have in place both in central processing centers and in the back of some stores. Presents us exceptionally well from a consumer facing standpoint, sharply priced and very well merchandised books. And look, books is a gateway category for thrifters.

Speaker 1

So this initiative has proven to be quite successful and a great return on investment for us from a capital perspective.

Speaker 8

Okay. Very interesting. Thank you. I want to pivot to inventory and I think it was asked earlier, but I am intrigued with the 50% growth in inventory year on year. It's a pretty big step up from prior quarters.

Speaker 8

So on one hand, maybe this suggests some very healthy sales that could come down the pipe. On the other hand, it could suggest some gross margin pressure.

Speaker 6

Maybe just

Speaker 8

help us think about the balance between those 2? And maybe also is OSD and Greendrop going to just drive this level of inventory growth in the quarters to come?

Speaker 2

Yes. Peter, this is Jay. And really that inventory increase is a function of the great supply that we've been seeing. We have a process where we take in inventory and if it's not the right season, we back stock it and hold it. So that's really the driver there from again, the basis of our inventory is so low that we do not have an aged or obsolete inventory risk or gross margin risk from that standpoint.

Speaker 2

So we feel very good about it.

Speaker 8

Okay. Thank you very much guys.

Speaker 5

Thank you.

Operator

Your next question is from Anthony Chukumba from Loop Capital Markets. Please ask your question.

Speaker 9

Good morning. Sorry, good afternoon. Thanks for taking my question. And nice job being on the top line given the light little bit of lightness on the top or beating on the EBITDA given a little bit of lightness on the top line. So I guess my first question, so you talked about the 2% to 3% comp guidance and sort of setting expenses to assuming that.

Speaker 9

I guess my question is, let's say you do 4%, like how much would that incremental 100 basis points of comp mean in terms of EBITDA?

Speaker 2

Yes. So we estimate we would flow that through about 30%.

Speaker 9

Got it. Okay. So you call it like a 30% incremental EBITDA margin. Is that right right way to look at it or think about it?

Speaker 2

Yes, I think that's fair.

Speaker 9

Okay. I will pass it on. I know a lot of people have questions. Keep up the good work guys.

Speaker 1

Thanks, Anthony. Thank you.

Operator

Your next question is from Mark Petrie from CIBC. Please ask your question.

Speaker 10

Hi, thanks for the question. Two I have two questions. Could you just give us a sense of the geographic breakdown of the 22 new stores? And are any of those in the boutique format that you've used selectively in Canada?

Speaker 6

Yes. Hi, Mark DeBron. The geography of the 22 stores, it is across all three countries. We do have a couple that are in the boutique format, but the vast majority are traditional stores. And then across the geographies themselves, it's pretty distributed.

Speaker 6

So we are not single threaded in any 1 or 2 markets in Canada or the U. S. As we've talked about in the past, we are fishing in every major market and looking for great opportunities. So you see a pretty good spread across all three countries.

Speaker 10

Okay. And the boutique, they're all in Canada

Speaker 4

at this point? Yes.

Speaker 10

Sorry, go ahead.

Speaker 2

I'm sorry. I just wanted to chime in. I mean, basically, right, Gibran, we have a handful of Australia opportunities that we're looking at that may come, but the majority of what we have in the 22 stores is basically fifty-fifty split between U. S. And Canada.

Speaker 10

Okay. And just to clarify, all of the boutiques, those remain in Canada or are you going to test that in the U. S?

Speaker 6

No, that is none in the U. S, those are in Canada.

Speaker 10

Yes. Okay, perfect. And then just on the green drops, how many of those do you have in the market today? And what's the plan for 2024?

Speaker 6

Yes. Greendrop is, again, we are actively pursuing multiple markets at the same time. As we talked about earlier, Mark, you can't start any supply conversation without talking about on-site donations. And so from a supply perspective, we are in a very robust position right now, not just for this year, but beyond. So, and we should expect that to continue.

Speaker 6

We've talked about this, right? I mean, when we provide the donor with a reliably fast, friendly experience, we can expect to be the donation destination of choice, whether that be the on-site donation or the Green Drop. Green Drop is our long term play, to take that same fast, friendly experience and meet the donor where they're at part of a daily use, and help us elevate supply quality for years into the future. So we like the performance of the Green Drops we've opened. We will continue to open up Green Drops this year, actually making an entrance into Canada as well.

Speaker 6

And again, we think that it's replicable. Now as we've talked about on previous calls, municipalities, landlords love Green Drops. They love the use. It's fast, friendly, clean, it presents well. There are some obstacles when it comes to what the code and the use envisions.

Speaker 6

There are many municipalities where that sort of very attractive staff donation point is not even envisioned in the code. So that varies by municipality. And the way that we mitigate against that is that we're fishing in multiple markets at the same time. That's what allows us to continue to grow that into the future. So as we sit today, we are just shy of 70 Green Drop locations and we'll continue to add to that this year and beyond.

Speaker 10

Okay, thanks. And then just back to the new store pipeline. I recall that one of the sort of business case arguments for the CPCs was a simplification of the shipping into different locations and effectively it sort of broadens the potential scope of the locations you could open fewer receiving doors I guess, specifically. So are any of the locations that you've agreed to for 2024 in that sort of spec? Or is it still the typical location that you've signed up for?

Speaker 6

Yes, great question, Mark. No, your intuition is right. Several of the locations that we're looking at for 2024 and by the way, some that we opened in 2023 are making use of that increased degrees of freedom, if you will. We are able to look at more boxes because of the freedom that that gives us exactly to your point. And that will be the case in 2025 and beyond as well.

Speaker 6

It really serves as an unlock for us and just kind of widens the top of that funnel of possibility of new stores for us.

Speaker 1

Yes, Mark. This is Mark. It's really accelerating our strategy of new store growth and it's giving us the opportunity to look at more locations. We're seeing that play out and it's been a big win for us.

Speaker 4

Okay, got it. Thanks for

Speaker 10

all the comments and all the best.

Speaker 6

Thank

Operator

you. Thank you. Your next question is from Bob Drbul from Guggenheim. Please ask your question.

Speaker 11

Hi, good afternoon. I was wondering if you could talk a little bit about sort of the wage pressure, wage trends that you're seeing in the stores and I guess labor availability and managers as you think about the 22 stores that you're opening?

Speaker 6

Yes. Hey, Bob, it's Bron. Fair question. We watch this pretty carefully. And just like everything else, we've got all the necessary metrics that give us a good snapshot as to what's happening in every market that we operate.

Speaker 6

At an enterprise level, I would tell you that the labor market has really improved over the last 6 to 12 months or so in the markets that we operate in. We've been pretty aggressive in terms of keeping up with competitive wage rates. From an overall wage rate perspective, we've grown 5% to 6% year on year. And we're seeing things settle down. I mean, at a country level, we've seen significant year over year improvement in turnover rate.

Speaker 6

Vacancy remains in the low to mid single digits across all three countries. So all in all, we feel very good about staffing levels in our stores as we think about new store locations. Again, all of these new store locations are operating in infill markets where we are able to leverage management pipeline, team member pipeline. I think the people services team along with our field operators do a very good job of getting out ahead of that curve in terms of cross training, hiring fairs that happen well in advance of the grand opening of a new store. So you put all that together, Bob, and I'd say we feel very good about labor in both our comp stores as well as the new stores to come.

Speaker 11

Great. Thank you. And any commentary around the Second Avenue stores? And if you guys are how the M and A pipeline availability is or how if you're looking at anything there? Thanks.

Speaker 1

Yes. So from a Second Avenue perspective, the team has done a great job of moving that initiative forward. We continue to see business contributions increase at a pace that we're very pleased with. So that was the fundamental part of that strategy as we continue to move that 2 way business forward. In terms of M and A, no news to report on this part of our strategy.

Speaker 1

It remains geographic infill with a strong supply base, solid brand locally, a stable workforce, but we're going to we're very judicious in our approach. And obviously, when the opportunity creates and fulfills itself, we'll be reporting it to the Street.

Speaker 11

Great. Thank you very much.

Operator

Thank you. Your next question is from Mark Altschwager from Baird. Please ask your question.

Speaker 12

Good afternoon. Thanks for taking my question. I wanted to touch a bit more on supply. I was hoping you could give us a little bit more color on the flow that you're seeing across the delivered versus on-site donations versus the green drop. And what you're seeing from a quality of supply standpoint with those various vectors?

Speaker 6

Yes. Hey, Mark, it's Gibran. From a quality perspective, I would tell you we've not been able to detect any meaningful changes in the average quality of supply that we see from each of the channels. What we've talked about in the past, we do know that the on-site donation by and large brings a higher quality supply than typical delivered. We do know that.

Speaker 6

In terms of how we modulate the amount of supply, on-site donation is the always on superior source of supply. We're always saying yes to the donor. And as we mentioned, we're seeing very robust performance and growth and on-site donation in all three countries, frankly. The flex lever in that is the delivered supply. That's the one that we are able to manipulate over long periods of time where if we're seeing very outsized on-site donation growth, we're able to flex for that by modulating delivered.

Speaker 6

So from an overall quality standpoint, not seeing anything meaningful that we can detect, no changes. But from a modulating the amount of supply that we acquire, that's really how we do it. Hopefully, that's helpful.

Speaker 12

That is helpful. Thank you. And then just as a follow-up, I think it was mentioned in the prepared remarks, you're expecting slightly higher product cost this year. Is that a function of the mix or is that a function of rates that you're paying your nonprofit partners? Just what's driving that expectation for the higher cost of materials?

Speaker 2

Yes, that's just typical and it is driven by the contractual rates with our not for profit partners and it's a typical renewal process that we go through. It's not very significant, but it is a little bit of a factor. And like I said on this call, we're able to offset part of that rate increase with increasing our OSD mix.

Speaker 4

Got it. Makes a lot of sense. Best of luck. Thank you. Thanks, Mark.

Speaker 4

Thank you, Mark.

Operator

Thank you. There are no further questions at this time. I will now hand the call back to Mark Walsh for the closing remarks.

Speaker 1

Thank you. I'd like to thank everyone again for their time and interest in Savers Value Village, and we look forward to speaking to you again when we report our Q1 results. Thanks

Operator

again. Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.

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Earnings Conference Call
Savers Value Village Q4 2023
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