Good afternoon, and welcome to Savers Value Village’s Conference Call to discuss Financial Results for the Second Quarter ending June 29, 2024. [Operator Instructions] Please note that this call is being recorded and a replay of this call and related materials will be available on the company’s Investor Relations website. The comments made during this call and the Q&A that follows are copyrighted by the company and cannot be reproduced without written authorization from the company. Certain comments made during this call 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 of these risks and uncertainties. Please be advised that the statements are current only as of the date of this call. And while the company may choose to update these statements in the future, it is under no obligation to do so unless required by applicable law or regulation. The company may also discuss certain non-GAAP financial measures. A reconciliation of each of these non-GAAP measures to the most directly comparable GAAP financial measure can be found in today’s earnings release and SEC filings. Joining from the management on today’s call are Mark Walsh, Chief Executive Officer; Jubran Tanious, President and Chief Operating Officer; and Michael Maher, Chief Financial Officer. Mr. Walsh, you may go ahead, sir.

Thank you, and good afternoon, everyone. We appreciate you joining us today. Let me just start by laying out the highlights to the quarter and the way we are developing the business, and then I’ll touch on each of these a little further. Our U.S. business performed well in the second quarter with results that were in line with our expectations. Our results in Canada were below our expectations, which we believe was driven primarily by macroeconomic factors. We feel very good about our pipeline of new stores and the performance of our recently opened stores. Our donation trends remain strong, and we continue to invest in a multifaceted supply and processing strategy that unlocks growth. Let me now touch on each of these in a little greater detail. Traffic and sales trends in our U.S. business remained solid throughout the quarter with consistent low single-digit increases in both transactions and average basket, while our business in Canada softened as the quarter progressed. Over the past few quarters, the Canadian economy has faced significant headwinds. GDP per capita has declined, and the unemployment rate has risen from 5.7% to 6.4% just in the first half of this year. Canadian household debt is over 100% of GDP and household debt service costs have increased sharply to over 15% of household income. Both are near historic highs. Housing affordability is a core issue. Canadian home mortgages typically require an interest rate reset every few years, resulting in substantially higher mortgage payments at today’s rates relative to a few years ago. Renters face similar cost pressures as Canadian rent inflation is up double digits over the last 2 years and new housing and apartment supply remains severely constrained. Against this backdrop, Canadian consumers are cutting back on discretionary categories such as apparel and…

Thank you, Mark, and good afternoon, everyone. It’s a pleasure to be here at Savers Value Village and participating on my first earnings call with the company. As most of you are aware, I joined Savers in May and have spent the first few months in the field and familiarizing myself with the business and the team. I find many reasons to be excited about this company, including its unique business model, significant long-term growth potential, highly engaged customers and talented team. My priorities are increasing shareholder value, strengthening our finance capabilities and evolving our approach to planning and forecasting the business across both near-term and longer-term time horizons. There is a strong foundation to build on, and I’m looking forward to working with the finance team and our business partners to help the company achieve its full potential. Our second quarter was highlighted by the acceleration of our new store growth plans, better-than-expected performance in our new stores, especially in the U.S., and continued progress in off-site processing. Our U.S. business was consistent with our expectations and first quarter trends, but sales and earnings in Canada were lower than we expected due to the challenging Canadian economic environment. Despite softness in Canada, our adjusted EBITDA margin was over 20% for the quarter, and we continue to generate strong cash flows, highlighting the resilience of our financial model. Turning now to the income statement. Total net sales increased 2% to $387 million in the second quarter. On a constant currency basis, net sales increased 2.8% and comparable store sales decreased 0.1%. In the U.S., net sales increased 5.4% to $207 million and comparable store sales increased 2.1%, driven by growth in both transactions and average basket. In Canada, net sales declined 2.4% to $150 million and comparable store sales declined…

Thank you very much. [Operator Instructions] First question comes from Randy Konik with Jefferies.

Yes. Thanks, Mark and good evening, everyone. I guess, first, Mark or Michael, maybe give us some perspective on – it sounds like you’re doing very fine and stable and good in the U.S. market. So maybe go deeper on that – kind of on that – on those stores first. Give us some perspective on the ramp you’re seeing, some changes in the cohorts of – more recent cohorts versus prior and what we can expect ahead on the U.S. store geography first. Thanks, guys.

Thanks, Randy. I think Jubran’s probably best suited to answer that. He’s here in the room. Jubran, why don’t you give a perspective on U.S. new store growth, and I can maybe fill in some things on demographics?

Yes, sounds good. Hey, Randy, well, as the guys talked about earlier, U.S. new stores are really strong out of the gate. I mean as a group, when you take all of our new stores together, they’re exceeding our expectations, both top and bottom line. But yes, U.S. new stores are especially strong, which is very encouraging for our long-term growth plans because as Michael talked about, it is the U.S. where we have greatest opportunity for new store growth. Canada stores, performing very close to expectations, admittedly a little hard to separate on the macro impact. But back to the U.S., I think one of the things that we’re most excited about is that it’s the reliability of our forecasting and the accuracy of our modeling. What I mean by that is we’ve always felt good about our approval process and our pipeline and our pro forma modeling for new stores. But as we sit today, we now have enough stores opened over the last 18 months, 24 months to have actual empirical data to compare to what our models forecasted. Obviously, very important as we think about what is shaping up to be a very robust pipeline of new stores for us and us having the confidence to place what could be some very attractive pieces of real estate for us as we look forward, so, all in all, very pleased with the U.S. new stores.

Yes. On a demographic basis, Randy, just a couple of quick highlights. We’re super excited about the continued growth of our loyalty program in North America, up double digits, the U.S. specifically, in terms of some demographic trends. What’s exciting, and we’ve talked about this before, both members, non-members and our new members are all skewing younger, and we have seen the household income of our membership raise a little – rise a little in that 100,000-plus cohort. So a lot of good trends there. Really excited about the continued momentum we’re seeing in the U.S. market.

Great. Thanks. My last question is, obviously, I want to kind of get some more perspective on the Canadian difficulties. Do you – when you think about the guidance and you think about current trends, do you think you’ve kind of captured enough of the potential downside in that market? And have you seen this maybe before, when you look back to historical financials and think through, the last time that’s kind of gotten difficult or challenged, if at all, in the Canadian market, what happened then versus now would be super helpful to get additional perspective on kind of when we bottom or if we’re getting close to the bottom in that market. Thanks, guys.

Sure, Randy. Thanks for the question. This is Michael. I think this particular downturn is unique. Mark outlined a number of the factors that are pressuring the Canadian consumer right now. And we see it in the macro data. We see it in the national retail statistics, and we see it in our business. And so, it’s hard to say with any precision just where that goes in the very near-term. We are confident that it is a cyclical moment. We believe that, like all cycles, it will end. But we’re not economists and we’re not trying to prognosticate when exactly that will be. So I do think, to your original question, the way we’ve constructed our guidance and the range that we’ve put around is intended to capture the reasonably plausible outcomes over the next 6 months. On the one hand, the household debt service pressures and cumulative inflationary pressures are not going to go away overnight. Those will continue to be pressure points on our consumer. On the other hand, inflation is coming down. The Central Bank has begun easing and we have seen outside projections that suggest that there could be improvement as soon as the fourth quarter. And so the range that we’ve established, we think captures those two possibilities. And that potential turn in either direction is really what drives the width of the range as we sit here today. The U.S. has been remarkably stable. It continues, since the end of the quarter, to run a comp store increase, not materially different from the way we exited the quarter. And so we really see the variability right now in the near-term in Canada.

Very helpful. Thanks, guys.

Your next question comes from Brooke Roach with Goldman Sachs. Please go ahead.

Good afternoon. Thank you for taking our questions. I was hoping you could elaborate on your ability to protect margins against a tougher Canadian macro environment where a greater proportion of total business revenue growth is coming from new stores rather than like-for-like increases in the base business. Can you potentially quantify the gross profit pressure that you saw between the new stores and processing relative to the deleverage that you saw on fixed costs? And help us walk through the puts and takes of how you’re thinking about margin protection going forward?

Maybe – Brooke, this is Jubran. Maybe I’ll just give a little color to the nature of your question, and then Michael can jump in with the rest. But that is – that’s absolutely right. That is a unique feature of our business where we can modulate processing levels, which bring with it material costs and more importantly, labor cost to match what we’re seeing on the demand side and the customer flow side. So as we’ve talked about over the quarters, we closely manage that. We manage production labor in our stores in response to demand, and it is a balance between preserving profitability, but also ensuring steady flow of fresh product to the customers, so that on a per-customer basis, we’re maintaining the sort of selection and value promise. There are limitations to that. Unfortunately, the softness that we’re seeing in Canada, which is very unique, as Michael has said, is honestly beyond the normal range of what we can leverage with processing labor. So we can protect. But with what we’re seeing macro, it does lead to some deleverage during the quarter. But we monitor it store by store, week by week, very closely.

Yes. Brooke, this is Michael. And I would just add to that, first off, that even in a difficult macro environment in Canada and a quarter that wasn’t up to our original expectations, we still were able to clear a 20% EBITDA margin, which I really think is a testament to the durability of the resiliency of this financial model. As we think about the various puts and takes and what the drivers were, so let’s just start with the second quarter. The biggest driver in the deleverage in the second quarter from last year were deliberate investments that we’ve made, number one, in new stores; and secondly, in off-site processing. To a lesser extent, the third factor was the decline in Canadian sales and some deleverage pressure as Jubran just said. So to take each of those in turn and talk about how we think about them going forward, as I think you know, new stores open, roughly half of our ultimate expectation for mature sales and they grow rapidly from there. So as we’re here now beginning early in our new store growth cycle, we are expecting some pressure from that. And that will ramp as we get into the back half of this year because our new store growth starts to accelerate here in the third and fourth quarters. Offsite processing, the other big investment, it does have added costs. There’s additional freight, there are overhead costs. And so when we open a new off-site processing facility, especially a large one like a CPC, that just creates some natural deleverage initially. The good news is that as we get better and as we push volume through these CPCs, as we improve processing efficiencies, we’re starting to see those costs per unit come down. And so we mentioned the Edmonton example, our most mature central processing center, now near parity with processing on-site. And so that’s a big opportunity. It was a tailwind that helped to mitigate the headwinds in gross margin in the second quarter. We think it will continue to do that. And over time, longer-term, in this model, as we get to a balance with our growth investments beginning to mature, we would expect that balance to start to tilt more in our favor, and we should be able to continue to sustain those long-run EBITDA margins near 20%.

Great. Thanks. And then just one quick follow-up. Can you speak to your outlook for AUR and pricing in your U.S. business? What was AUR in the U.S. business this quarter? And are you seeing any additional signs of price sensitivity in your core customer?

I could speak to this quarter. So transactions in basket were both flat. And so we don’t really get into more granular funnel metrics than that. But in the U.S., it was low single-digit increases in both and Canada was low single-digit decreases in both. We really don’t – we don’t break our guidance into any more granularity than that though.

Great. Thanks so much. I will pass it on.

Your next question comes from Matthew Boss with JPMorgan.

Great. Thanks. So Mark, with the softer economic backdrop that you cited in Canada, so is it the maturity of the thrift market there? Or any changes in competition that you think are constraining customer trade down in that market? Maybe what have you seen from Canada in July? And just any actions or company-specific initiatives that you’re taking to improve traffic in the back half of the year?

Yes. So we – Matt, good question. We conducted a pretty significant survey of Canadian consumers. What we are seeing are thrift shoppers are experiencing more financial stress than the general population. While we see some modest trade down from consumers reducing spend at non-discount retailers, unfortunately, this is more than offset by weakness in the lower-income cohorts, which – there tend to be a higher percentage of our core customer base. So I would describe it as they’re really sidelines as their pressure – their financial pressure has increased their sidelines. The good news is that in that same survey, they feel like once their disposable income returns to levels that they’re more comfortable with, it will return once that improvement happens. Look, we’re already very well penetrated in Canada, and thrift is widely adopted. I think the core data that we’re seeing from the Canadian government’s retail sector indicate that we’re holding our own from a competitive standpoint. We’re doing a lot from trying to try to generate additional traffic through targeted promotions, the engagement metrics that we see in those efforts have been best in class. I’d point to that double-digit increase in member growth. So – and retention levels there are still very, very high. But we’re going to continue to test tactics to drive traffic and conversion, but we won’t do it where it’s negative ROI. So as we’ve tested these approaches, we’re very mindful of spending good money after bad or bad money after good, everyone think about it. So hopefully, that answers your multifaceted question.

Yes. And then maybe just a follow-up for Michael. On gross margin, could you just walk through the puts and takes to consider for gross margins in the third versus fourth quarter? And just what is the time line for CPCs to reach maturity and cost per unit parity as you outlined?

Sure, Matt. So as far as margin in the second half of the year, let’s just go ahead and, for simplicity, use the midpoint of the guidance range, and you can flex up or down from there as you see fit. But overall, at the midpoint, we’re looking at a similar margin in the second half to what we had in the first half. And what that implies is more compression versus last year, which is a reflection of new store growth accelerating in the back half of the year and that being a bigger headwind. The guidance endpoints from there, the variation from there, would just be the varying degrees of sales leverage or deleverage off that midpoint, primarily in Canada, as I said. We do think that the continued improvement in off-site processing costs will help mitigate that margin pressure and continue to do that going forward. As far as how the quarter split up, Matt, I think what I’d point you to is the comments I made about how adjusted EBITDA margin will play out over the third and fourth quarter. And really, that’s almost entirely driven by dynamics in gross margin. So essentially, we think that EBITDA margin compression relative to last year will be similar in both the third and fourth quarters, almost all of which, again, is driven by gross profit margin compression as well. And again, it’s a reflection of the accelerated new store openings beginning in the third quarter.

Yes, Matt, can I ask Jubran to jump in because I think the powerful trend and what we’ve achieved in Edmonton on a cost per unit basis is just the beginning. And I think there are some real positive signs in our other CPCs about moving in that direction. And I think it’s a big unlock for our growth moving forward.

Yes. Yes, it is. Matt, Jubran here. So we’re citing Edmonton only because that was CPC number one. But one of the nice benefits of our learning curve here is that you get to efficiencies faster in subsequent CPCs. So, I will give you an example. Our location in Hyattsville, Maryland, which some of you are actually familiar with and may have had a tour in, that facility has been open 1.5 years and is operating at a unit cost parity, if not even a touch better than Edmonton in a far shorter timeframe. So, as we think about the five CPCs we have now, we have a sixth planned for Southern California, which will open early next year. The maturity curve on these things has really come down to a point where you get to parity, as Michael talked about, in terms of cost per item, equivalent to what a traditional store would do for itself. And that obviously has massive implications for us, like Mark talked about for new store growth.

Great. Best of luck.

Thanks Matt.

[Operator Instructions] Your next question comes from Peter Keith with Piper Sandler.

Hi. Thanks. Good afternoon guys. I was unclear on the guidance reduction. It looks like both sales and EBITDA were taken down by $35 million at the midpoint. So, I understand the sales deleverage dynamic, but can you help us understand that margin flow-through and why the EBITDA comes down so much?

Yes. Pete, this is Michael. So, we talked about the – what’s behind the reduction in the sales. We do have some mitigation reflected in there in terms of managing labor to match that. As Jubran mentioned earlier, we are not able to completely offset that at a certain point. We have got to have a minimum amount of labor to just ensure a continued flow of new product onto the floor. The rest – honestly, the rest of the changes are pretty immaterial, very small items in expense puts and takes, and it really comes down to the reduction in Canada sales.

The CPC margin headwind and new store margin headwind, a little bit greater than you expected?

No, we had contemplated that before. I think just as you bring down sales to a certain point, the deleverage pressure, which was the other element of our gross margin headwind in the second quarter, just starts to become a greater factor.

Okay. Alright. And then for Mark or Jubran, one theory going around out there just is regarding your pricing analytics and we know you have very good analytics. So, when sales are strong, you can take up prices by store, by category. But the theory out there is that the analytics don’t tell you to take prices down. And so is that correct? And could you be in a situation where, in Canada, you have taken up the price and maybe things are weak because you have out-priced some of the competition?

We are always engaged in understanding our price-value relationship. It is something that the field operations team puts a lot of energy into. So, we are monitoring that closely. We don’t feel like we are askew from that particular dynamic. If we do, we will make adjustments for sure. But we are looking at competitive data all the time. We are cross-shopping stores in terms of competition to make sure that we are in line. I know personally, I have been in 50-odd stores in the last three months, and our price-value relationship remains strong and at $5, it’s still a pretty powerful value proposition.

Yes. And Peter, this is Jubran, the only thing that I would add is double-down on what Mark mentioned earlier that we are not sitting still. All the analytics, all of the competitive intel that Mark just talked about is valid. But we are also tinkering and testing, test and learn on some more aggressive pricing and discount approaches in select stores to see if there is something that we can hit upon that will help mitigate the macro that we are seeing. So, I think it’s a blend of things, and I think we will continue to learn.

Very good. Thanks so much.

Your next question comes from Michael Lasser with UBS. Please go ahead.

Good evening. Thank you so much for taking my question. Outside of the relative maturity of each market, what is different about Canada and your stores there that would make it not a leading indicator for what might happen in the U.S. if macroeconomic conditions decline in this country?

Well, look, I think part of it is you have to start with the macroeconomic environment is very different in Canada right now. U.S. has much lower unemployment and certainly, much lower household, that thrift is in a much earlier stage of maturity, and there is a lot of secular growth available. On the flip side of that, Canada is, for us, 95% brand awareness, penetration, our estimate, in one of three households, it’s just a very – they are apples-and-oranges, Michael. And I do think what we are seeing in the data that we have gotten over the last three months really indicates that, that core – a good portion of our core customer is under significant financial pressure. And the discretionary choices they are making are really sidelining them from coming into our environment. But I will point to the fact that we grew our database, our loyalty program, double digits, even in face of that. So, I think there is still a lot of momentum in both countries. We are just going to continue to monitor that situation and operate the business in a way that gives us firm footing coming out of that negative macro cycle.

Got it. Mark, my follow-up question is – and either you or Michael or Jubran can comment on this. It’s been about a year since the IPO and the business has been a little bit more challenged than what you had anticipated coming out of the gate. So, a, outside of the macro, is there anything that you would attribute that more challenging managing ability to drive the business to? And, b, what do you think is the new or updated algorithm for the business in terms of new stores, comp growth, margins as we look to 2025 and beyond?

Yes. So, I will start, and I think Michael will jump in. When we set the table for the IPO, I look back a year – from a year ago and say, well, our U.S. business has been right where we said it was going to be. Australia has performed better than we had hoped. We have opened up our off-site production facilities in an efficient manner, and they are now performing at a level that we didn’t even anticipate. They are even better than we had hoped. The new store – I think the new store piece of the equation was always the biggest challenge, right on target. They are delivering sales and EBITDA in line with our expectations. I don’t think we could have ever foreseen what has happened in Canada. So, therefore, I would score the organization pretty highly on executing what we articulated we would execute going into that IPO. I think we are managing through, hopefully, a generational issue in Canada and will come out the other side as we did with the pandemic in a good place and stronger than when we started. And Michael, do you want to touch on the…?

Yes, Michael, let me speak to your question about the long-term growth algorithm. So, I want to be clear. First of all, I am not specifically speaking to 2025. We will obviously have more to say about that in a while. But as we look at the long-term model, we continue to see high-single digit annual revenue growth, and it will be driven primarily by new stores and our recent track record on new stores and the pipeline that we have in front of us gives us a lot of confidence that, that will be our long-term growth driver. We think comps, we will plan on probably something in the low-single digit range for comps with the U.S. higher than Canada. As Mark just mentioned, Canada is a more mature business for us. Thrift is a more mature sector. And so all of that adds up to the U.S. being the growth driver, we have a lot of runway there. We have a lot of our new stores will be placed there. And as those stores become comp stores, they should result in accelerating comp store growth in the U.S. or at least elevated comp store growth relative to Canada. I think as far as the profitability, we should be able to continue to support EBITDA margins near 20% as those growth investments in new stores and off-site processing capabilities start to mature and the initial headwinds that we are seeing today start to convert into tailwinds. Again, early signs of which we have already seen. So, I think no real material change to the totals or the headlines out of that model, maybe a little bit different in the shape of it. But at the end of the day, we feel really confident in that.

Thank you very much.

[Operator Instructions] Your next question comes from Mark Altschwager with Baird. Please go ahead.

Hi. This is Amy Teske on for Mark. Thank you for taking our question. I wanted to dig in on supply. Last quarter, you noted you were in a bit of an oversupply situation. So, wondering an update on how you view your current supply levels, and then more broadly, any commentary on the quality of your supply and your supply mix?

Yes. Hi Amy, this is Jubran. Good question. So, yes, that’s right. Last quarter, we were in a temporary oversupply situation. I would tell you that, that has been solved partly because of some moves that we were able to make to effectively kind of open a pressure relief valve and sell off excess, but also because of the new store pipeline, that’s just gotten more and more robust. So, we look 18 months out when we are planning supply, and there are some new stores on the docket that weren’t there three months ago, that are going to consume some of that. So, as we think about the drivers of supply for us, on-site donations, robust performance, as Mark talked about earlier, Green Drop, our non-profit partner delivered supply. It really is multifaceted, and we look at this market-by-market. So, we continue to see strong OSD growth. We can flex delivered product as we need to. We are looking 18 months out. We have always done that, I would tell you, that discipline is more at a premium today than at any time because of all the new stores that are coming. So, we feel great about our supply situation. We feel great about the supply that’s going to feed the rest of the stores that will open in ‘24 as well as the stores that we are going to open in 2025. And then we are always looking to cultivate to look at the long-term equation, knowing that we are going to be opening 25, 30-plus stores per year going forward. As far as the other part of your question, Amy, on quality, we have not detected any change in the average quality of what is flowing through our supply stream, be that delivered product, Green Drop or on-site donations. We just are not able to detect that it’s changed in any meaningful way. Hopefully, that answers your question.

Yes. Great. Thank you. And then I was also hoping you could provide an update on Green Drop and where you are tracking to your 20 to 25 opening target? Thank you.

Yes, absolutely. Green Drop continues to progress. We are opening up new locations. I would say we are probably closer to the low end of that range. Again, we have talked about this before. I mean Green Drop brings all of the elements that we know drive donations, convenience being number one, reliably fast, friendly and part of the daily weekly routine for the donor. So, municipalities love it. Landlords love it. Donors obviously love it. The challenge is there is still an education process that has to happen because when you think about land use and municipal approval, Green Drop is one of these attractive collection mechanisms that’s actually not contemplated in a lot of the municipal land use codes that we run into. So, it’s all part of the process. We have the team built. We have the assets. We have the knowhow. We are tracking the performance of the new locations that we have opened over the last 18 months, and they are doing very well. So, yes, we will continue to open these things, and it will be an important feeder of supply into the future.

Great. Thank you. Best of luck.

And we have no further questions at this time. Mr. Walsh, I will turn the call over to you for closing comments.

Thank you, operator. I would like to thank everyone for their time and interest in Savers Value Village, and we look forward to speaking with many of you in the days and weeks to come. Thank you very much.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.