Good morning. Welcome to Ollie’s Bargain Outlet Conference Call to discuss Financial Results for the First Quarter Fiscal 2022. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie. As a reminder, this call is being recorded. On today’s call from management, we have John Swygert, President and Chief Executive Officer; Jay Stasz, Senior Vice President and Chief Financial Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer. I would now like to hand the conference over to your host today, Jean Fontana with ICR. Please go ahead.

Thank you. Good morning and welcome to Ollie’s first quarter fiscal 2022 earnings conference call. A press release covering the company’s financial results was issued this morning and a copy of the press release can be found on the Investor Relations section of the company’s website. I want to remind everyone that management’s remarks on this call may contain forward-looking statements, including, but not limited to, predictions, expectations or estimates and actual results could differ materially from those mentioned on today’s call. Any such items, including with respect to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements which speak only as of today and we undertake no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K, quarterly reports on Form 10-Q as well as our earnings release issued earlier today for a more detailed description of these factors. We will be referring to certain non-GAAP financial measures on the call that we believe maybe important for investors to assess our operating performance. Reconciliation of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release. With that, I will turn the call over to John.

Thanks, Jean and hello everyone. Thank you for joining our call today. We are pleased with our first quarter sales results, given that we were up against strong stimulus-induced sales last year. During the quarter, sales of seasonal product were negatively impacted by cooler weather and consumers experienced pressure from significant inflation, particularly on gas and food. We have seen meaningful improvement in our second quarter results, with increased demand for warm weather seasonal products combined with our incredible deals and strong inventory position. Currently, our inventories are in terrific shape and we continue to see compelling deals on great brands across our merchandise categories, especially those that are key to our business, including HBA, housewares, lawn and garden, air conditioning and pets. In addition, our DCs are running well and goods are flowing into our stores on a timely basis. While we have not yet seen the full benefit of consumers trading down due to economic pressures, we are doubling down our efforts to offer great values as consumers continue to feel inflationary pressures. Looking back at the first quarter, our comparable store sales decreased 17.3% compared to 2021, slightly below our expectations. This was largely due to softer performance in weather-dependent categories, such as lawn and garden air conditioning pool and seasonal sports-related items. We saw strength in hardware, HBA as well as pets where we have been building our assortments. We are even more enthusiastic with the quality and quantity of great closeout opportunities we are currently being presented across – being presented with across many of our merchandise categories. These deals will enable us to deliver great brands and even better value to our customers. With the increasing inflationary pressure, we believe it is important for us to emphasize our extreme value proposition. We see an…

Thanks, John and good morning everyone. For the quarter, net sales totaled $406.7 million, a 10.1% decrease from the prior year. Comparable store sales decreased 17.3% in the quarter compared with the prior year. As John mentioned, we are up against unprecedented stimulus last year, while cooler weather impacted the sales of our seasonal product categories. In the quarter, we opened 9 new stores, ending the period with 439 stores in 29 states, a 10% year-over-year increase in store count. Since the end of the first quarter, we have opened 9 additional stores, including 3 that are having their grand opening this week. We plan to open 46 to 48 stores this fiscal year, including 2 relocations. Gross profit decreased 22.6% to $141.3 million and gross margin decreased 560 basis points to 34.8% compared to 40.4% in the same period a year ago. The decrease in gross margin was due to increased supply chain costs primarily the result of higher import and labor costs partially offset by improvement in merchandise margin. SG&A expenses as a percentage of net sales increased to 28.6% in the first quarter of fiscal ‘22 from 23.1% in the first quarter of fiscal ‘21. The 550 basis point increase was primarily due to deleveraging as a result of lower sales. Operating income totaled $17.1 million compared to $71.2 million in the prior year. Operating margin decreased 1,150 basis points to 4.2% due to lower gross margin and deleveraging of SG&A expenses as a result of the decline in sales. Adjusted net income was $12.8 million and adjusted diluted earnings per share, was $0.20. Adjusted EBITDA was $26.2 million and adjusted EBITDA margin decreased 1,100 basis points to 6.5% for the quarter. Capital expenditures totaled $9.7 million primarily for new and existing stores. This compares with $9.5…

Thank you. And our first question comes from the line of Jason Haas with Bank of America. Your line is open. Please go ahead.

Hey, good morning and thanks for taking my questions. The first, John, I was curious if you could provide some more color on what you are seeing in regards to the closeout opportunities that are out there. What categories you are seeing with this opportunity? And if you can provide any color on what sort of sources where they are coming from these days? That would be helpful. Thank you.

Yes, Jason. We – I would never divulge who we are getting the product from. That’s not what we do. But obviously, you have been in the stores a lot and you know we source a lot of times. But with regards to the flow, it’s getting pretty general in almost all of our categories. We are seeing an outsized flow right now in the HBA categories and the houseware categories, but we are starting to see some goods pop in sporting goods that’s starting to push pretty good. We are seeing some goods flow in the food category, starting to see some embedded bath for domestic area. Lawn and garden has been in some special categories this year so far, so starting to see some breakthrough in the toys. So we are starting to see it everywhere. And I think that’s not a surprise to anybody probably on the call that things are changing in the marketplace and we are starting to see some pretty large opportunities for us and our customers.

Thanks. That’s great to hear. And then as a follow-up question, I know you had mentioned a trade-down. I think you had said you are not seeing the full benefit yet. So I am curious, are you starting to see any evidence that customers are starting to trade down into your channel or are you not seeing it yet and there should be a full benefit to come?

I think, Jason, it’s hard to tell with that perspective, but I do think we are seeing a little bit, but I don’t think we are not seeing what we would expect to see yet. I think there is still more to come. I think there is probably another – and sometimes we are ahead of it too far, but probably another 3 months to 6 months before we see the full benefit come through.

Thanks. That’s great to hear. And I just wanted to say, Jay, it’s been a pleasure to work with you and I wanted to wish you the best of luck in your next opportunity.

Thank you, Jason. Appreciate it. Same to you.

Thank you. And our next question comes from the line of Peter Keith with Piper Sandler. Your line is open. Please go ahead.

Hey, good morning, everyone. Thanks for taking the question. So John, I guess it sounds like the closeouts are getting better, maybe 3 to 6 months to get trade-down, but at the same time, it sounds like you guys are taking a more cautious view in the back half of the year. Could you just kind of frame up what you’re seeing right now that results in that lower second half comp outlook?

Yes, I think, Peter, it’s just something – we want to be conservative in how we manage the business. We don’t want to get ahead of ourselves. We’d rather chase it than be too far ahead of our skis and then have an issue with the inventory that we would not be able to get rid of. So we’re just taking it easy and we’re going to push when the time comes to push and push hard. So the opportunities are out there to be had, and our merchants will be patient, and we will be able to close on the deals when it’s time.

Okay. And as you’re probably seeing out there, there is quite a bit of promotion and markdown activity across retail as a lot of retailers are over-inventoried. Obviously, that’s going to create closeouts for you. But what’s the competitive landscape right now and for you just competing against this highly promotional environment?

Yes, Peter, we watch it each and every day, and our merchants have been looking at what the big box retailers have been doing with some of their price reductions to try to move some of their inventory out. And everything we look at is a non-competitive issue that we don’t have the same product that they are moving through or we still have a nice value proposition compared to what the reduced prices anyway. So we’re not finding any problems with our current pricing. But as we always say, we will be a low price leader. If there is someone who has the same item that we do and they are beating us on price, we will take the markdown accordingly, but we’re not seeing that yet.

Okay. Sounds good. Thanks, good luck and Jay, I wish you nothing but the best.

Thanks, Peter. Appreciate it.

Thank you. And our next question comes from the line of Mark Carden with UBS. Your line is open. Please go ahead.

Good morning, thanks a lot for taking my questions. To start, another one on consumer behavior, are you guys seeing any notable traffic or ticket shifts between your Ollie’s Army and non-Ollie’s Army shoppers?

With regards to the ticket or the basket, we’ve always have seen a notable difference between the Ollie’s Army shopper the non-Ollie’s Army shopper. I think the spend is about 40% greater for the Ollie’s Army shopper versus the non-Ollie’s Army shopper, and that’s been consistent. What we – in terms of number of visits and transactions for the non-Ollie’s Army shopper, we don’t know that. We don’t know who they are. So we couldn’t but we know the spend for the Ollie’s Army shopper is much, much stronger.

Great. And then just in terms of the supply chain, what would you guys say the biggest unanticipated pain points are today? And how do they compare with what you’re anticipating at this point last quarter?

This is Eric, Mark. I’ll answer. I don’t think we have an unanticipated pain point at this point in time. We do have challenges that we continue to face, but our throughput is where we needed to be to serve the business in all three distribution centers, and we have the important international transportation capacity to ensure goods flow and that we can properly support our business, especially our seasonal businesses – business, which was problematic last year. Our last kind of remaining challenge of any consequence is getting our Texas building to be more efficient throughputs where we need it to be with efficiencies and opportunity.

Great. That’s helpful. Thanks so much and best of luck, Jay.

Thank you.

Thank you. And our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Please go ahead.

Yes. Hi, guys. Good morning. I wanted to ask you about inventory. So there has been some talk this morning about inventory up a lot year-over-year. But inventory per store versus 2019 is only up about maybe 16% or so, and you’re guiding comps up probably mid-singles from there. How are you thinking about your inventory level overall? How much of the increase here is just sort of amortized supply chain costs? How are you feeling about like unit volumes of inventory? And does this impact your ability to go after the closeout opportunity that’s ahead?

Ed, this is Jay, and I’ll start on this. We feel good about our inventory levels. To your point, a large chunk of that increase is the increased supply chain costs. And when we look at ‘19, we think we’re in good shape from an inventory level standpoint. Obviously, we had a little bit of a shift in sales from Q1 to Q2. We expect the sales going forward in, Q2, Q3, Q4 to be strong. And we would expect the inventory levels overall to kind of normalize as really closer to the end of Q4 and kind of sequentially step down between then and now. But we feel fine where we’re at.

Ed, I’ll add a little color on that. With regards to the – and obviously, it’s hard for you guys to see from the financial statements what the in-store inventory is versus what’s in the DC and what the capitalized costs are. Compared to ‘19, we are almost right about in line on an inventory per store in the actual comp stores look in ‘19 to ‘22, not adjusting for inflation. So I don’t think we are sitting heavy at all in the stores when you adjust for the price changes that have occurred with the inflationary pressure we’ve seen. And I think there is still opportunity for us, but I think we will get – you won’t see such a large disparity to 2021 as we move through the year, as Jay had mentioned.

Okay. And then just a follow-up, and this is for you, I think, John, but I’m interested in sort of open to buy and how you’re thinking about positioning yourself for the opportunity that’s ahead right? I mean we’re hearing large retailers now canceling orders. Clearly, it seems like there is going to be some very big opportunity from a deal flow perspective. But how do you think about running the business from an open-to-buy standpoint? There is obviously like an art component of that? How do you feel about taking risk where it’s appropriate leaning into the opportunity? And do you have the capacity to do all of that?

Yes. I think, Ed, the big thing is that we go back to is the concept of dry powder, and that’s our merchants being very patient and confident that the deals are going to come and make sure they wait for the absolute A++ deals. And we are severely focused on that today, and every merchant has been spoken to, and they are fully aware of how this is going to work in the back half of the year. So we basically are keeping dry powder, keeping nimble and being very selective on what we’re going to buy and being aggressive on our offers because the main key from our perspective is we have to give the consumer a great value. And that also assists, and the trade-down effect is if I give somewhat compelling value they can’t resist, they are going to come to the store to save money. So that’s where we’re at in our piece of the puzzle. But to your point, the open to buy is very fluid at Ollie’s and always has been. There is a lot of art more than science here the way we operate the business. But we do have our parameters. We do have the ability to collapse on deals that we believe are home runs and have the ability to hold them in the DCs, and we are nimble. So we will not pass on the deal if it’s what I call gold, and we are working accordingly. So the merchants are pushing hard on their open to buy, but we’re not going to get over our skis. And as you know, Ed, following us for many years, we are not fast fashion. We’re end of life in the cycle for a lot of items. So there is not a lot of risk with what we’re buying. We’re buying general merchandise, hard goods that are not fashion-driven, and we’re already buying last year’s model. So that plays into how we operate.

Great. Thank you. And good luck, Jay.

Thanks, Ed.

Thank you. And our next question comes from the line of Kate McShane with Goldman Sachs. Your line is open. Please go ahead.

Hi, thanks for taking our questions. I guess just to round out the last question, we just wondered if closeouts are still going to represent about 70% of sales for the year or could it maybe be more given the circumstances going into the back half?

Well, Kate, I would always answer this question with Mark in the past. We’d love closeouts to be 100% but we know that’s not possible. His history would tell you, Kate, it’s about 70%. If we got to 75%, that would be a big, big move, but we are pushing very hard. We are definitely favoring domestically sourced product versus import. So the buyers are working diligently on that. So the more closeouts we can find domestically, that would be great. But there are going to be closeouts, what we call stock lots in Asia as well from a lot of the cancelers that won’t even make it here yet from the other retailers that have canceled them out will become closeouts as well. So wherever the closeout is located, we’re going to go after and go after it hard. So we’ve always run the business that closeouts are first and then everyday value goods are second. So we will mix that in accordingly.

Okay, thank you. And then our second question was just about how traffic trended through the quarter. Are you able to walk us through the cadence by month and how that maybe improved in May?

Yes, Kate, this is Jay. And we don’t get into inter-quarter trends. But I can say our comp was a negative 17.3 in the first quarter, obviously going up against the stimulus. About 90% of that was driven by a decrease in transactions. The rest was a slight decrease to 10% in average basket, and that was really driven by AUR with some of that is driven by the shift of those higher ticket items, seasonal items out of Q1. And then the trends so far, and we’re not going to get specific, but they have improved materially really across all fronts. So we’re seeing, as the weather has cooperated, the trends on both transaction and average basket are getting stronger, and we’re comfortable with our guidance for the first quarter – I’m sorry, the second quarter of flat to a positive 3.

Okay. Thank you. And best wishes, Jay.

Thank you very much.

Thank you. And our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is open. Please go ahead.

Hi, everyone one. It’s Simeon Gutman. You mentioned we’re not seeing the trade-down yet. Can you give us a clearer picture of what the buildup looks like, whether it’s traffic ticket items in the basket? What does the buildup mean? And why are you signaling that we’re getting to that point?

Simeon, obviously, this is part of the art of the business. It’s not the science here to be able to know exactly what’s happening. The reality is we will all know when the trade-down effect has really gotten to full force because our comps will start driving on an outsized basis as they have historically. So I view that to come here in the next several months. But with regards to actually knowing where it’s coming from and how it’s too early for me to tell you that, I think I forecast this probably before anybody else did last year that something was coming, and we are seeing pressures that we’re in now everyone’s starting to see it now. We just saw it earlier, and I think we will see the benefits earlier as well. So I think we’re moving towards that. And it’s just strictly math. Consumers only have so much disposable income in every single week to put more gas in the car. And they go to the grocery store, they have less disposable income and they start to feel the pressure regards of who you are. So that I believe is coming and most importantly, where the compelling deals and the opportunities for us to give them a price they can’t resist, I think, is right around the corner.

Okay. Fair enough. A follow-up and maybe two parts. First, back to inventory. The dollars are up a lot, Ed mentioned, not as much on a per store basis. Can you talk about why this – that means you’re going to have higher costs and you’re probably going to raise price. And I guess, going back to the inventory question, why isn’t there risk or for elevated markdown risk for the rest of the year? And the second part of the question is the acceleration in the stacks on a 3-year basis, which adjusts out for stimulus is pretty significant going from Q1 to Q2. So what is driving that sequentially?

That was a lot more than two questions, Simeon. That was a mouth – that was a boatload.

Simeon. I can address a couple of those things. I mean I think on the cost piece, right, we’ve talked about those increased supply chain and import costs. Those are – even during Q1, the cost came in line. We had a little headwind on margin just because they de-levered because of the sales drop. But look, going forward and we’ve given guidance on the margin those costs are baked in to our gross margin estimates. So we think we’re in good shape there. To your point, on a markdown risk, I mean, we feel we feel good with our inventory. I mean, I review the 18 in detail every quarter. We don’t have any age problem. And look, at the environment, we don’t know what’s going to happen with the promotional environment in the next coming months, but we have our standard cadence of promotions with Ollie’s Days and other clearance events. So we don’t expect there to be significant markdown risk going forward. And then as far as the comps, to your point – and again, we’re kind of – the way we look at it is a 3-year geometric stack basis. I mean, we’re starting to anniversary that a little bit and talk about comps in a normal in a normal way with a 0% to 3% for Q2. And then higher than that, like we’ve talked about on the last call for the back half in Q3 and Q4, mid-single digits. And we had an inherent acceleration built in when we gave the guidance last time. And now this time, we do forecast a slight incremental uptick in Q2 because of the shift of the seasonal sales out of Q1 into Q2. And then we’ve actually tempered our back half forecast by about 1 point. But generally speaking, I would say we have the seasonal shift into Q2. We have a better overall inventory position as we go through Q2 and Q3 and even Q4 for that matter. And if you recall last year, we did have some timing delays of shipment of key categories, seasonal categories, both late in Q3 and in Q4. So that’s – we just think that and coupled with the deal flow and what we’re seeing, we think we are very well positioned to drive these sales and we don’t think it’s overly aggressive for the remainder of the year.

Okay. Thank you both. Good luck Jay.

Thank you.

Thank you. And our next question comes from the line of Matthew Boss with JPMorgan. Your line is open. Please go ahead.

Great. Thanks. So, John, maybe at the category level, could you just elaborate a little on top line performance in May? Where have you seen the sequential improvement exactly? And then just how are you thinking about June and July comps relative to May in that second quarter outlook? And then maybe just on Simeon’s question, if we are thinking about your core customer, they are clearly under increased pressure relative to pre-pandemic. Your stores are a destination, given the higher gas prices. I guess what’s giving you this confidence in the back half for mid-single digit comps or a – over a full return to algorithm?

I think, Matt, the biggest part is the trade-down effect. That’s definitely going to play into our hand. The core customer – yes, our core customer is not on a fixed income side. That’s a misnomer where our average house is about $55,000. So, it’s not somebody who is at a poverty level or that’s strapped that they can’t do anything. So, there is a portion of them, without a doubt, that I think all of us have in the portfolio, but we have a wide range of customers that we deal with. But there is a big piece that are out there that – and we have seen it historically when people get strapped, the trade-down effect comes to us. And a lot of it is based on the deal flow we are able to get. And the ability to motivate the consumer to come in the building, we believe that on its way. I think everyone is aware that the retailers are having some struggles right now retailers struggle, that is the ability for us to see some great product and give a great value to the consumer. So, that piece, I feel pretty good with. I don’t know the timing. But we will know the time when it happens, and we will see the results, and we will be able to deliver. So, that piece, I am comfortable with. What was your other question, Matt?

Well, Matt, on the cadence of the comps in the quarter, it’s pretty consistent by month, not a whole lot of difference between those three.

Okay. Great. And then Jay, just on the gross margin as a follow-up. So, if we think about the first quarter, what accounted for – I think it was about 100 basis points missed versus forecast. And then could you just walk through distribution versus merch margin as we are thinking about the second quarter? And what now are you embedding for the year on the distribution headwind?

Yes. So Matt, to your point, we were about 100 basis points off forecast. About 60% of that was driven on the merch margin side. So, we did have a 130 basis point improvement in our merch margin year-over-year, but we had forecasted even more. And then on the supply chain side, we had a headwind, but that was really, as I said, attributable primarily to just deleveraging those costs on the sales. We didn’t have a miss from a dollar standpoint, and we are right in line. So, looking forward, we haven’t really changed our forecast on the supply chain side of things. I mean, obviously, it’s going to be elevated year-over-year just like it has been. And the way we think about it is that in the first quarter, year-over-year, it was about a net 560 basis point degradation in margin. We would expect that in Q2 – we have given you that guide. But year-over-year, it probably gets better by about 90 basis points to 100 basis points. Q3 then becomes about half of that from a year-over-year headwind. And then, finally, as we talked about, in Q4, we get back to much more normal. We are expecting to be above 39, maybe a little haircut from where we were on the last call, but not significantly different. And really, Q4 is when we expect to kind of normalize across the board and get closer to the long-term algorithm.

Matt, just to add a comment, it’s Eric. The supply chain expense improvement is primarily driven by better container costs for imports moving forward under our new contracts.

Great. Best of luck.

Thanks Matt.

Thank you. And our next question comes from the line of Paul Lejuez with Citi. Your line is open. Please go ahead.

Hey. Thanks guys. Just on inventory. Are there any categories that you have large increases above and beyond what you would like right now? I am curious also if you have any. What you feel like the availability is not as good as you would hope? And then second, just to understand on the SG&A line, if results were to come in any different than planned, how much flexibility do you feel that you have on the SG&A line, given some of the inflationary pressures out there? Thank you.

Yes, Paul, with regards to the inventory, I would tell you we don’t have any pockets of over-inventory position that we are concerned with as a company right now. There is no areas we think there is risk today. With regards to areas that we would like to see more flow, I would say the one and only area that today still exists, it’s getting a little bit better but it’s not where we would like to see it will probably be in the packaged food category. There is still not a lot of breakthrough there yet. And I am not sure how much it will come, but we have seen a little bit of improvement in the last several weeks, but we are still getting our fair share, but we would like to get more of it. But other than that, we are seeing great flow, and we don’t think there is any risk with what we are carrying right now.

And Paul, this is Jay. On the SG&A side, I would tell you we run pretty lean already. Obviously, payroll would be the lever we would look to pull. That’s our biggest impact on the expenses. If sales are softer than what we are forecasting, we would attempt to recover just some portion of that in payroll. We can’t obviously get it all back. Otherwise, yes, I think we run pretty lean. We are seeing some cost pressures on our advertising. From a print standpoint, the cost of printing has gone up. And then also utilities are significantly up year-over-year. So, we have got those things embedded into our model, and it’s not huge dollars, but adding a little bit of headwind. So, I think that’s how I would answer that.

Got it. Thank you. Good luck.

Thank you. And our next question comes from the line of Scot Ciccarelli with Truist. Your line is open. Please go ahead.

Very good morning. This is Josh on for Scott. Our question is on the remodels. Can you guys provide any more detail on the cost there and maybe in the early results you are seeing in terms of the comp lift from those stores?

Sure, Josh. This is Eric. I will take the question. We are not going to go into the specifics on comp lift. It’s only six stores. So, keep that in mind that we completed. We are on track to complete 30 stores. And the six stores are in line with our expectations, meeting our expectations. And our expectations are an average investment of 125,000 will get a return in 2 years or less, and those six stores are meeting that expectation. So, we are going to continue to move forward and read customer feedback and results and update again in the quarter.

Got it. Thank you.

Thanks Josh.

Thank you. And our next question comes from the line of Jeremy Hamblin with Craig-Hallum. Your line is open. Please go ahead.

Thanks for taking the questions. I want to come back to the gross margins for a second. So, the guidance change about 60 basis points, you noted a couple of factors in that. Supply chain, maybe still a little bit worse than expected, but also a product mix shift, I think was called out. Could you quantify the split between those two and the 60 basis point change for the year? And which particular product categories that – in that negative mix shift that would be driving that downside?

Hi Jeremy, this is Jay, and I can start to address that. I mean for our internal model, we had about a 50 basis point change. And so part of that, to your point is absorbing – actualizing Q1 and then the mix component that we are estimating going forward and I would say it’s about half and half between those two components. There is also a little deleveraging on the sales given that we took down in the back half, but that’s probably 10 basis points of it. And then going forward, obviously, and John or Eric might speak to this as well, but we are seeing strong sales trends in the consumables. So, that’s putting pressure on the mix. And at the same time, right, it’s the other side of the equation. Some of the products, the categories that aren’t moving as strong that we would typically have a higher margin on, whether that’s books or domestic, eventually, all of that will shake out. And part of our margin guidance is the focus on making sure that we provide value to the consumer. At this point in this environment, we think that’s critical moving forward.

Got it. That’s helpful. And then just on a go-forward basis, so it sounds like by Q4 you are feeling pretty good that you are going to be back to 39% or maybe slightly better than that, more normalized margins. If we can take the crystal ball and look ahead a little bit, there is obviously a lot of noise, supply chain and so forth. But in terms of thinking about ‘23 and you are now seeing your normalized sales levels that have gotten back above 2019 levels, from a gross margin standpoint, is there anything that you see now that you are seeing better throughput, improvements in deal flow, presumably maybe a more normalized return on the product mix where your gross margins wouldn’t be returning to what your typical levels would be in that kind of 39.5% to 40% for the full year?

Jeremy, this is John. I would tell you, for 2023, I feel pretty confident that we would see a normalized gross margin rolling out as early as Q1. I don’t foresee too much pressures in 2023, once we annualize the heavy load we are carrying right now with the import costs and whatnot and the increased supply chain. So, I think you will start to see the benefit in Q4, and I think we will be back to pretty much normalized levels in Q1 in full year 2023.

Great. Thanks for taking the questions. Best wishes, Jay.

Thank you.

Thank you. And our next question comes from the line of Randy Konik with Jefferies. Your line is open. Please go ahead.

Yes. Thanks guys. How are you? I think it was mention before earlier in the call around container rates improving. Can you just expand upon that a little bit and give us some perspective on how much improvement you have seen and when those improvements start to take hold, I guess in the contracted rates?

Sure. The – most of our contracts, Randy, start first. And so we begin to incur the benefit of those contracts when they sail, which is starting in June. So, we are kind of right on top of beginning to realize some of the savings. When you look at last year, we had peak import rates around kind of the peak of the market, say, starting in August into September, October. And it really didn’t stop at some of the absolute peak spot market rates. We are right at that September, October timeframe. So, we are up against rates when you hit – when we hit peak versus contract. We are approximately 50% less on contract versus some of the peak spot rates we were paying. I am not going to get into too many specifics on our contract rates, but also know that we have lost some flexibility to leverage spot market as we move into the back half of the year with at least some expectation that spot market rates could be favorable this year.

Super helpful. And then I guess the press release also talked about higher wages in select markets was the exact kind of quote. So, can you give us maybe an update on labor market – labor wage increases? Are we starting to see that start to peak out in areas? Just kind of what’s the outlook there for wages and so on and so forth? Thanks.

I think Randy, from a wage perspective, as we – as we have always said, we adjust wages market by market by market. So, whenever we see – especially going through new market, we adjust according to what other retailers are paying. And for an existing market, we start to see pressures with hiring, we will adjust accordingly. Not seeing a ton of change in the existing market that we are in, existing markets we are in today. New markets, we are working through as we go through them. The DCs, knock on wood, have been pretty stable. But when I say that, it could change tomorrow. So, I don’t hang my hat on the DC wages as that world is evolving each and every day. So, we watch it, but we have been pretty steady for a while. So, I will just leave it at that. And if we have adjustments we need to make, we will make them accordingly to keep the supply chain stable because it’s more costly not to have people working than not. So, we feel pretty good. We are still pretty good where we are sitting. And I think things are changing in the world. So, we will see where it goes, but we are going to continue to be competitive to get the workers and be able to run the model properly.

I guess last thing to just ask is, I guess for Jay is when you then kind of think about what we just talked about where it sounds like there is more visibility in the freight costs losing flexibility or on the spot market, but you have more visibility, and it sounds like there is more stabilization around labor and wages. I guess what I am trying to ask is does there – is there more kind of a clearer picture in kind of being able to make that annual guide at this point of the year versus maybe what you kind of guided to obviously at the beginning of the year? There is just more visibility towards the model. Is that fair?

Yes. I think on the supply chain side of things, I think that’s a fair comment. I think on the store labor front, we have visibility to that, too, and it’s a dynamic market. And obviously, we still have a big bogey if – we talk about on every call, but if we had to adjust wages like $15 an hour across the board, which we would never do, that’s a big nut. So, yes, I agree with you, Randy. I would say that the component – a couple of components that come to my mind that are maybe a little more uncertain would be bunker fuel, diesel fuel rates. Obviously, we have got a forecast, and we are doing our best, but that’s a volatile market and then I think what we have already talked about on the merchandise mix side and how that plays out in the future on what consumers are buying and what we do to lean in on price.

Great. Thanks guys.

Thank you.

Thanks Randy.

Thank you. And I am showing no further questions at this time. And I would like to turn the conference back over to John Swygert for any further regard.

Thank you, everyone, for your participation in today’s call and continued support. We look forward to updating you on our second quarter results on our next earnings call. Stay safe. Thank you.

This concludes today’s conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.