Savers Value Village, Inc. (SVV) Q1 2024 Earnings Call Transcript

Good afternoon, and welcome to Savers Value Village Conference Call to discuss Financial Results for the First Quarter Ending March 30, 2024. 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 SEC for a discussion on those 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. A reconciliation of each of these non-GAAP measures to their 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; and Jubran Tanious, President and Chief Operating Officer. Mr. Walsh, you may go ahead, sir.

Thank you. Good afternoon, everyone. Appreciate you joining us today. We started 2024 on solid footing, underpinned by secular trends, a growing loyalty program, and an underlying value proposition that is driven by our unique product selection and shopping experience. We have a number of areas that we want to discuss today, namely our first quarter results, our strong new store performance and pipeline, an opportunistic acquisition of a small thrift chain in the southeast, that establishes a beachhead for accelerated growth in a key geography where we have considerable white space, investments we are making to differentiate ourselves and support accelerated growth, shopper trends and finally the CFO transition we announced this afternoon. I'll start with our results. Overall, we are pleased that our first quarter results were in line with expectations we provided on our last earnings call. In Q1, we delivered $354 million in sales and $60.3 million in adjusted EBITDA, representing growth of 2.5% and 2.1% respectively. One theme which we will be discussing today is the divergence in the trends between the U.S. and Canada. Specifically, while our comparable sales on aggregate were 0.3%, the U.S. grew by 2.3%, while Canada saw negative comparable sales of 2.6%. Notably, on a 2-year stack basis, our aggregate comp store sales increased 7.5%, with the U.S. up 7.9% and Canada up 6.4%. As I will discuss in a bit, we are facing more difficult macro conditions in Canada than what we are currently seeing in the United States. Moreover, given our existing established presence in Canada, where we already are considerably more penetrated and where thrift is already more widely adopted, the macro pressures have tended to be more impactful to our results. In the U.S., consumers also remain cautious with discretionary spending, but thrift exploration and acceptance continues to grow. As we have referenced, 85% of consumers have interacted with thrift as a shopper or donor, and 1 in 5 indicate that they will increase their spending over the coming years. While we are facing some macro headwinds in Canada, we continue to invest to drive accelerated unit growth in sales. As you will recall, we opened 12 stores in 2023 and are pleased to report that we are on track to reach our 22 store opening target this year in 2024, with 21 leases already signed. As Jubran will discuss shortly with 7 additional stores in the southeast via our 2 Peaches acquisition, we expect to add a total of 29 stores this year, representing a 9% growth of our consolidated store base at the start of the year. More importantly, the performance of our newly opened stores has demonstrated strong unit economics, with a targeted return on investment north of 20% and are performing in line with our underwriting model. We continue to expect a back-end weighted opening schedule this year and a more balanced quarterly cadence for new store openings next year, resulting in significantly more new store openings in the beginning of 2025 on a year-over-year basis. The investments we have made in the real estate development team are powering the new store growth engine and we are well positioned to accelerate this growth given the significant white space opportunity we have in front of us. I'll now turn the call over to Jubran to discuss our recent acquisition and our exciting plans for the southeast.

Thanks Mark. Echoing Mark's comments, we continue to have tremendous growth opportunities, fueled by strong secular trends and the huge white space ahead of us. Right now in the United States, we are underpenetrated in most major markets that we currently operate in, and we have no presence in the U.S. Southeast and virtually no presence in the U.S. South, which obviously presents a significant opportunity for us. We announced this morning the acquisition of a regional thrift store chain in Georgia by the name of 2 Peaches. As part of the diligence process, our analysis indicates significant upside potential given the local demographics and attractiveness of the real estate itself. While the impact of the acquisition will not be material to our 2024 financials, this is a key development in our unit growth strategy as it provides a beachhead from which to grow in an important new geography like the southeast, home to some of the fastest growing states in the country. As we have previously discussed, supply is one of the gating factors when opening a new store or entering a new region such as the southeast. In addition to the real estate itself, the 2 Peaches stores also bring an attractive and critical base of supply. Leveraging our centralized processing centers and their long-haul product delivery, we have a proven ability to feed stores with offsite processing that allows us to enter new regions faster and more nimbly compared to starting from scratch. As part of our transition and integration, we will initially transition 2 of the stores to operate in the same manner as our existing Savers Value Village stores by supplementing their local supply from our centralized processing center in Hyattsville, Maryland. That will allow us to very quickly elevate the selection and overall value proposition to the 2 Peaches customer, without the longer lead times required with building this capability locally. Over time, we will convert the remaining 5 stores to the Savers Value Village model and transition the off-site processing support to the local area to optimize transportation costs and overall cost of goods. We expect the maturity curve on these locations to more or less match the 5-year curve we see with our traditional new store openings. Finally, as a reminder, we are making continued investments in new centralized processing centers, off-site production facilities, housing smaller warehouses, and automated book processing units. We currently operate 5 centralized processing centers, with the latest having opened in Minneapolis late last year. We plan to open our 6th in California either later this year or early in 2025 to further support growth in the western region. We also completed 8 new automated book processing deployments and opened 4 off-site production facilities in 2023. This is a great illustration of our continued investment in future growth in retail and supply. Now, I'll turn the call back to Mark.

Thanks Jubran. Returning to the first quarter, the broader macro environment, weather, and shopper trends created some challenges. Like many other retailers, we faced external factors and headwinds in Q1 that impacted our financial results. Severe weather in January resulted in a number of store closures and traffic disruptions early in the quarter, impacting Q1 sales by approximately 50 basis points. In addition, we experienced unfavorable holiday shifts in Canada at the beginning and the end of our fiscal quarter associated with New Year's and Good Friday, impacting Canada Q1 sales by approximately 90 basis points. While our U.S. business was in line with our revised expectations, our Canadian business did not perform as we expected. This is a challenging time in Canada for many retailers and the macro headwinds have gotten stronger since the end of last year. The softness we experienced in Q1 was driven mostly by a pronounced slowdown in mid- to late March, primarily driven by fewer visits from non-loyalty members. Importantly, our non-loyalty member customer segment skews younger and is at the lower end of our household income scale. This demographic tends to be more affected when the economy takes a downturn. They're shopping less often, as typically happens when people are stretched for cash and are uncertain about the future. By comparison, sales from our core loyalty members, who make up 70% of our sales base, were more resilient in March in Canada. In fact, we continue to add loyalty members at a healthy pace in the Canadian market, growing 12.9% year-over-year in quarter 1. Moreover, our customer data shows that loyalty members remain firmly committed to our brand, with high shopper satisfaction and low attrition, particularly amongst our best and highest spenders who represent nearly half of our sales. Given our operating model where we generate our supply locally and where our cost of goods is principally labor, we believe Savers Value Village is uniquely positioned to perform amidst these headwinds. Our operating model provides nimbleness to manage our production, and production labor can be adjusted to be more in line with consumer demand, thereby limiting pressure on our EBITDA margins. We will be aggressively testing ways to increase shopper trip frequency and reengage customers who may not have shopped with us recently. These efforts, which include increasing marketing in certain Canadian markets, focusing production on certain categories which we know drive frequency and purchases, and delivering targeted promotions have already begun. In this environment, consumers are focused on quality and value. Savers Value Village delivers a unique value proposition to these consumers, offering quality items at the right price. When it comes to the consumer, our customer data in North America continues to remain very positive. Our customer satisfaction scores remain high. Our merchandise selection continues to resonate with shoppers and customers' intent to shop levels remain very strong. We believe our brand is exceptionally positioned to meet the needs of today's consumers. Before I move on to our detailed financial results, I'd like to take a moment to address the CFO transition we announced today. We are thrilled to welcome Michael Maher as our new CFO, effective Monday, replacing Jay Stasz. I want to thank Jay for his many contributions to Savers in helping us successfully launch our IPO, and we wish him all the best. Michael is a seasoned finance leader with more than 25 years of retail and consumer experience, most recently as the Interim CFO of Nordstrom. He is a perfect fit as we position Savers Value Village to capitalize on our accelerating growth opportunities. We're really excited to have him on board. Michael is looking forward to joining us on future calls. But for today, I'll take you through our first quarter financials in a little more detail. Let's start with sales. Net sales increased 2.5% to $354 million. Our net sales growth was driven by new store openings and the comparable same-store sales increase of 0.3%. As a reminder, we were up against our highest same-store comparison of the year in Q1. In last year's first quarter, comparable store sales increased 9% in Canada and 5.6% in the U.S. and 7.2% on a consolidated basis. In the United States, net sales increased 4.7% to $192.6 million. Comparable store sales increased 2.3%, driven by both an increase in transactions and an average basket. In Canada, net sales were flat at $134 million. Comparable store sales declined 2.6%, driven primarily by declines in transactions from non-loyalty members. Cost of merchandise sold as a percentage of net sales increased 260 basis points to 44.7%, with the increase driven by higher material, labor, benefits, and freight costs. The increase in material costs as a percentage of net sales was in line with expectations and driven by the ramp of the 2 new centralized processing centers that were opened in the second half of last year and the higher mix of processing coming from those facilities. The increase in labor as a percentage of sales was driven by two things: higher labor rates, which again were expected, and secondly, declines in labor productivity, which were unexpected and were driven by the deceleration in Canadian sales in the month of March. While we do look to align production with sales trends, the drop-off in March Canadian sales made it difficult to properly align production levels late in the quarter. Since May 1, we have better aligned production levels to consumer demand. The increase in benefits expenses as a percentage of sales resulted from higher-than-expected health care claims late in the quarter. Pounds processed and donation mix. We processed 238 million pounds in the quarter and generated a sales yield of $1.41. This compares with 240 million pounds processed and a sales yield of $1.39 in the first quarter last year. On-site and GreenDrop donations represented 71.9% of pounds processed in the quarter versus 68.3% in last year's first quarter. Our on-site donations were again very strong in the first quarter and we remain pleased with the quality of our inventory. Salaries, wages, and benefits expense was $84 million compared to $93 million in the first quarter last year. These figures included $18 million of IPO-related stock-based compensation in this year's first quarter and $24 million of special onetime bonuses in last year's first quarter. Excluding these items, salaries, wages, and benefits as a percentage of net sales declined 120 basis points to 18.6%. The decline was primarily driven by lower incentive compensation. Selling, general, and administrative expenses as a percentage of net sales decreased 30 basis points to 22%, primarily driven by lower maintenance and utility costs. Depreciation and amortization increased 26.4% to $18.3 million, while interest expense decreased 34.3% to $16.1 million. Net income and adjusted EBITDA, the GAAP net loss for the first quarter was $500,000. Adjusted net income increased 32% to $13.9 million or $0.08 per diluted share compared to $10.5 million or $0.07 per diluted share in last year's first quarter. Adjusted EBITDA increased 2.1% to $60.3 million and our adjusted EBITDA margin was relatively flat with last year's first quarter at 17%. Turning to the balance sheet, we ended the first quarter with $102 million of cash and cash equivalents. At the end of the first quarter, our total borrowings outstanding were $765.8 million. And our net leverage based on a trailing 12-month adjusted EBITDA was 2.1x. We've taken a number of steps to strengthen our balance sheet over the past several months. In late January, we amended our senior secured credit agreement. The amended agreement combined with a corresponding upgrade of our debt rating by Moody's, lowered our borrowing rate spread by 175 basis points; S&P subsequently upgraded our credit rating as well in April. In early March, we paid down $49.5 million of principal on our senior secured notes. And finally, in April, subsequent to the first quarter, we terminated our interest rate and cross-currency swaps and realized net proceeds of $38 million, adding to our cash position and further strengthening our balance sheet after the end of the first quarter. As mentioned, we acquired 2 Peaches LLC on May 6, 2024. Seven stores will be included in our United States store base beginning in the second quarter. As discussed earlier, we are increasing our investment in these growth opportunities and do not expect material contribution year 1 from these stores. As Jubran discussed, this acquisition represents an important step forward in our strategy to open new markets. Let me wrap up the financial section with a few comments on how we are thinking about business for the rest of the year and our guidance figures. On the sales side, we are reiterating our full year 2024 outlook at $1.57 billion to $1.59 billion. Given the performance of our new U.S. stores and with the inclusion of $7 million from 2 Peaches, we currently expect to be at or above the midpoint of the total sales guidance range. We are also reiterating our full year comparable store sales increase in the range of 2% to 3%. Absent a macro improvement in Canada, we believe we are more likely to come at the lower end of our comp store sales growth range of 2% to 3% for the year, with Canadian comps diluting consolidated comp performance. On a 2-year stack basis, comparable store sales will be 7.5% in the first quarter, and we are modeling between 6% and 6.5% for the remaining quarters. As a reminder, our same-store sales comparisons get easier as the year progresses, and total net sales should benefit in the back half of the year from new store openings and the 2 Peaches acquired stores. As mentioned earlier, we cut production levels in Canada in early May to align with demand trends, and this should help profitability in the coming quarters. The combination of improving net sales growth and production leverage should drive higher flow-through to the bottom line as the year progresses. Given the negative year 1 contribution from 2 Peaches, increased marketing efforts to stimulate Canadian sales, increased investments in our team and processes ahead of accelerated new store openings in the back half of the year, and beyond and the effects of top line pressure in the Canadian comps, we are guiding our full year adjusted EBITDA to a range of $330 million to $340 million, which at the midpoint of our total net sales guidance would be an adjusted EBITDA margin of 21% to 21.6%. With the higher sales and flow-through outlook in the second half of the year, we would expect adjusted EBITDA to decrease slightly on a year-over-year basis in the first half, and increase in the mid- to high single-digit percentage range on a year-over-year basis in the second half. In conclusion, the Savers Value Village long-term growth algorithm continues to solidify. Our significant self-generated cash flows being deployed to open new stores, opportunistically acquire, innovate to drive a steady and cost-effective flow of supply to new and existing stores and markets, and invest in technology that provides our organization with the data to execute at the highest levels. I hope you took away that our growth trajectory continues to accelerate and it's highlighted by 29 new stores in 2024, consisting of 22 new store openings and 7 via the 2 Peaches transaction, 4 new off-site production facilities, 8 new automated book processing deployments, double-digit growth in our loyalty member program, strong overall shopper satisfaction, and we expect it to be approximately 1.5x net leverage by the end of the year, all of this while delivering value with an average unit retail of around $5. Again, I'd like to thank all of our team members who I truly believe are the best, most passionate people in the industry. We would now like to open the call for questions.

Your first question comes from the line of Matthew Boss from JPMorgan.

Great. So Mark, maybe to kick off, could you speak to the health of your U.S. business? Maybe elaborate on U.S. traffic or basket trends as the first quarter progressed, any change in trends so far in the second quarter? And any change at all in the trajectory of U.S. business for this year as you see it?

No. We're really excited about the trajectory in the U.S., the first quarter positive. I think the takeaway for us that 2.3% comp, it was a mix of transactions, a little bit of price. We like the 2-year stack. And as we see us moving into the second quarter, we're seeing the same trend. So we feel really good about what's happening in the U.S., thrift continues to grow. We added another 8.5% to our loyalty program. Shopper satisfaction is around 87%. And I think the most exciting piece of all of this is our new stores are performing at or above our expectations. That is just super exciting. So we continue to see that thrift experience resonating, our brand resonating, the way we're merchandising our items is resonating. And I think the question always is the trade down. We continue to see acceptance in all household demographics. So higher household demographics as well as the lower income, trade down secular acceptance, however you want to describe it, we feel really good about our trajectory in the U.S. And I must say Jubran architected the 2 Peaches acquisition, this is a great step forward for us, in terms of expanding our footprint in the U.S. If you just look at the U.S. footprint, we're actually going to grow our U.S. footprint by 12% this year, which is really exciting and rolling a step forward for us.

And then on gross margin, could you just help break down the drivers of gross margin contraction that we saw in the first quarter? And how best to think about the cadence of gross margin in the second quarter versus back half of the year?

That's a great question, Matt. I plan to have Jubran join us halfway through the discussion to provide some more insights. Contextually, the first quarter is typically our lowest gross margin quarter, and this year, we projected it would be around 57.5%. From that starting point, two main factors contributed to a decrease in our expected margin. First, as we highlighted earlier, in mid- to late March, we experienced several significant benefit claims that differed from our previous projections, and we do not anticipate these recurring. Second, and most importantly, is the production labor issue. After an upward trend in February, we noticed a decline in March, even after accounting for weather disruptions and holiday shifts. While we maintained production levels close to our targets, we later discovered that our production hours did not align with unit demand. It's not as simple as switching production on and off. However, the strength of our model allows us to adjust quickly, and within a couple of weeks, we worked to restore the balance between production hours and demand. Jubran and our country leaders acted swiftly, and I'm excited to share that the team has a solid plan moving forward through the end of May. I would like to let Jubran elaborate on the specifics and explain our approach to these adjustments.

Yes, absolutely. We experienced a lot of weather disruptions in the first quarter, but when looking at a two-year comparison, we were pleased with what we observed in the first two periods. We want to ensure we're providing the right selection to our customers, especially when we believed demand would be strong. However, starting in mid to late March, that demand didn't materialize as expected. The macroeconomic situation was significant, and the shift was abrupt. As Mark mentioned, we need to recalibrate our strategy, highlighting the durability and flexibility of our business model. In our stores, we refresh our inventory every three to four weeks, with the merchant acting as the operator. Here's our plan moving forward. It's crucial to note that we take a tailored approach rather than a broad one, assessing each store individually. Some stores in Canada are performing well and need no adjustments, while others are over-extended, and this trend continues into the second quarter. We have a range of situations, so our strategy isn’t one-size-fits-all. At a more granular level, particularly focusing on departments, we see the most potential in women's and kids' categories. Within women's, areas like long sleeve knits, capris, and dresses present significant opportunities since they have relatively low sell-through rates. This allows us to reduce labor costs associated with those items, considering that labor costs are tied not only to pounds processed but also to number of items displayed. As for how stores can reduce labor, it varies. It includes natural attrition and scheduling adjustments among other methods. We're optimistic about the strategy we've set in place. As we approach the midpoint of the year, we expect to see scale leverage benefit us. The changes we've implemented should yield positive results moving forward, and I'm proud of the team's thoughtful and precise approach.

And Matt, I'll just add one more comment. With the easier comparisons in the second half and the more cautious production approach, we're confident in our margin range for the year and for 2024.

Your next question comes from the line of Randy Konik from Jefferies.

I guess first, maybe it will be helpful, Mark, or Jubran, maybe give us some historical perspective on the Canadian market and thinking through how you've seen this movie before in the numbers and how we should be thinking about how Canada performs, generally speaking, with this type of macroenvironment over the next, let's say, couple of years or so? Just give us your thoughts there would be super helpful.

What stands out about our position in the Canadian market compared to the United States is our starting point. We have 95% brand awareness and estimate that we're shopped by one in three Canadian households, making us an integral part of the Canadian landscape. While non-loyalty members are facing challenges, our loyalty members continue to shop regularly with very low attrition rates, representing 70% of our overall sales. Additionally, shopper satisfaction in Canada is at 85%, which indicates our strong competitive stance. Despite rising unemployment, housing challenges, and inflationary pressures, we believe our value proposition positions us well to gain market share. Our 6.4% two-year stack in Canada for the first quarter suggests we are gaining ground. Overall, our value proposition, strong brand awareness, and marketing approach will support us as the Canadian economy navigates this tough period.

Great. And then maybe just give us some perspective on where we are with the various initiatives as it relates to the central processing centers and book processing initiatives just as it relates to improving long-term productivity and margin enhancement potential. Just give us your thoughts there.

Hey, Randy, Jubran, I can take that one. Well, first of all, we feel very good about CPC. So, we currently have 5 CPCs. The latest one that we opened is in Minnesota. As we have opened these, our experience set has grown and we're able to ramp them faster. And one of the very cool things about the capability that it's unlocked is if we think about our most recent CPC, the Minneapolis facility, we're actually using that to support what we call long-haul stores. So it services some stores in the Twin Cities, but it's also supporting stores that are more remote, 4, 5, 6-hour drives in terms of Sioux Falls, Fargo, places where the labor market still continues to be very challenged and yet we're able to bring all of the selection and value to those customers because of the presence of the CPC. So, we're already doing this. And as you think about the 2 Peaches acquisition, that's what gives us the confidence to be able to quickly and nimbly bring selection and value to that customer as well because we're already doing it. We do have plans to open a 6th CPC in the Los Angeles market, it will be either later this year, possibly early 2025. Automated Book Processing facilities, again, we're far along the experience curve on ABPs, and by the time we end this year, we will have 12 facilities in the U.S. and 7 locations in Canada. And they're doing fabulously. Really pleased with the investment thesis on those and the return on invested capital. So, all in all, very pleased. We continue to make those investments like Mark talked about. And then, the only other one I would add is the offsite warehouse. And I think we talked about this on a previous call, where one of the unlocks that we've had from CPC is the ability to open new stores that don't necessarily check every physical attribute that we would need from a traditional perspective, right, the double dock doors, things that we've talked about in the past. Well, offsite warehouse is kind of a light version of CPC where we're able to still use it to make new stores happen that couldn't otherwise. So, there are markets where that is very applicable, Long Island, as an example. We have expansion plans in Long Island. As you think about the real estate and the availability of large warehouse space in Long Island, it's very limited. And that's where an offsite production warehouse comes into play and we're going to be opening one there, that helps make new store growth on the island happen. So did I answer your question, Randy?

Yes, that was super helpful. Really appreciate it, guys.

Your next question comes from the line of Brooke Roach from Goldman Sachs.

You've provided a lot of context on some of the actions that you're taking to drive a reacceleration in the Canadian customer engagement so far. I was hoping you could elaborate on the early reads of what you've seen as you've begun to implement these changes. Has that driven a reacceleration in comp where those changes in marketing, loyalty, discounts, and promotions have been implemented? And specifically, what Canadian comp are you embedding in 2Q and for the full year within your guidance?

I think we should start with the second part of your question first. We're targeting a 2-year growth stack of around 6.6% overall, with Canada being lower and the United States being a bit higher. It's too early to evaluate the marketing efforts. We have initiated four or five distinct initiatives focusing on the win-back program, implementing connected TV in specific markets to drive traffic. We are also increasing promotional activities to enhance category performance and boosting our digital voice share in designated markets to see if it increases foot traffic. These initiatives have just begun, and I believe in the next three months, we will have a clearer understanding of their impact. I should be able to provide an update on these efforts in the next call.

And then maybe a more comprehensive update on your 22 new store opening plans for the year. How do you anticipate these new store openings to split by geography? And how should we expect the cadence of those stores to split by quarter?

Good question. By the end of the second quarter, we will have opened 4 of the 22 locations, with 3 in the U.S. and 1 in Australia. By the end of the third quarter, we anticipate opening an additional 11, including 4 in the U.S., 6 in Canada, and 1 in Australia. In the fourth quarter, we plan to open the remaining 7, consisting of 5 in the U.S. and 2 in Canada, which means 12 of the 22 will be in the U.S. Overall, we are very pleased with the stores' performance, which has met our expectations. The U.S. stores have gotten off to a great start. One thing we discussed in a previous call was our schedule, which is back-end loaded this year, largely due to the real estate team we have been developing. Looking into 2025, we already have 13 planned, with 7 set for Q1, which is still in the works, and 6 in Q2 also in development. This progress is a result of a mature real estate team, and we expect the store openings to be more evenly distributed across the quarters moving forward. We're just beginning this transition starting in Q2 and into Q3. Additionally, we reviewed some unofficial deals and found that our current volume of active deals is 2.5 times greater than it was at this time last year. We're very pleased with this momentum and the strong foundation our team has built, and we look forward to the remainder of this year and into 2025.

Yes, it's important to note that we have 21 out of 22 stores for this year, and the leases are signed. We're feeling very positive about the momentum we've built over the last 18 months in real estate.

Your next question comes from the line of Peter Keith from Piper Sandler Canada.

Oh, not in Canada, but good afternoon, everyone. I wanted to ask about 2 Peaches. Could you compare it to the 2nd Ave acquisition? I remember that with 2nd Ave, you scaled back sales to focus on profitability. It seems like 2 Peaches is quite different. Are sales currently low and will you be increasing them? Additionally, will you rebrand those to the Savers name? Lastly, I believe you mentioned $7 million in revenue from about 7 months of sales, which appears to be a rather low figure overall.

So, I'll answer. I'll let Jubran jump in on most of those questions, but on the name, we quite like the Value Village name. So we're going to keep it in Georgia.

Yes, absolutely. Peter, your comparison to 2nd Avenue is a great observation because it highlights a contrasting situation. When we evaluate these seven locations, we see significant potential for profitability. They are situated in strong trade areas and quality centers. If we were to consider these as new organic locations for approval by our real estate committee, they would definitely be approved. The challenge we face, for various reasons, is that the quality of the real estate and the profitability potential of these stores suggest that customers have not been adequately served in terms of selection. However, with the flexibility afforded by the Hyattsville CPC, we can swiftly convert two of those locations while still utilizing the Value Village brand, allowing us to enhance basket size and transactions as we proceed.

Yes, we see great potential. And this is an inroad, obviously, to the southeast, and our ability to supply this or supplement supply through the CPC in Maryland is just a big, big win. And one of the things that's super interesting about what the process and how Jubran led the process is, we basically looked at the universe of the 2 Peaches stores and did basically 1 to 1 analysis on each one of those stores. And yes, 7 passed muster, and we said, we love these 7. We actually did not take 3 of the stores because they weren't up to our real estate standards. So, we really love the portfolio that we got and we think this is a great way to get ourselves into the deep south. We're really excited about this.

Okay. It was $7 million of revenue for the remaining 7 months of the year. Is that correct?

That's correct.

Okay. All right. Separately and maybe a little bit follow-up on Brooke's question, I'm just trying to get comfortable with maintaining the comp guidance. So, fair enough that you're kind of thinking about the low end. That does, to me, imply like a 2.5% for the rest of the year. And if I break that down further, I kind of have to model out like a 4% for the U.S. and then flat for Canada. So, it kind of implies pretty healthy acceleration in both countries, and maybe, is that kind of a good framework and if so, help us get comfortable with that framework.

Well, I think one of the things is certainly the comps get easier as the year progresses if you recall our P9 and P10 last year. And as we think about the second half of the year, look, it's about those 2-year stacks, and we're comfortable in that 7%, 7.5% range in the U.S. for the 2-year stack and 5% to 5.5% in Canada, which ultimately gets you that 6.5% 2-year stack for the full year for the consolidated entity.

Your next question comes from the line of Michael Lasser from UBS.

Can you quantify what the impact will be from being slightly more promotional in Canada in an effort to support the comp? And if some of the economic weakness that's currently happening in Canada comes to the U.S., such that your comp weakens here, would you take similar action by being a bit more promotional and how would you frame the potential impact in that case?

That's a great question, Michael. So, let me start with, we are testing, we're being very, very prescriptive about what we're doing in Canada. We are not doing a country-wide promotional activity approach. We're taking very specific markets and testing different things within those markets to see about the opportunity of growth from a transactional perspective and from a revenue perspective, and then what, if any, impact that has on margin. So, we're being, I wouldn't say cautious because we're acting quickly, but we're still testing into an approach that would make sense economically for us within that country.

And historically, the thrift model has seen or perceived to see a trade down benefit during more challenging economic times. Mark, why do you think you're not seeing that in Canada? And could you be seeing some impact of that right now in the U.S. that are providing support to your comps here?

I'll start with the U.S. aspect first, Michael. We're excited because we notice increases across all our demographics. Currently, we are leaning towards the higher two segments. While it might seem like a trade down, we believe it's more of a long-term trend. People are being more thoughtful in their purchasing decisions, and the thrifting experience is enjoyable and engaging. So in the U.S., it's difficult to frame this as a trade down. We prefer to view it as a broader trend around thrifting and the thrift experience. In Canada, we have achieved 95% brand awareness and are present in one out of three households, based on our demographic estimates. Our overall shopper satisfaction scores stand at 85%. The challenges we face in terms of comparable performance are primarily affecting non-members, who tend to be younger and of lower income. They are making trade-offs with their discretionary spending, which is challenging during this time. However, we are gaining market share compared to competitors, particularly those selling textiles and household goods. Our competitive positioning feels strong. Looking at our two-year stack in Canada for the first quarter at 6.4%, it indicates our current state. Yes, we encountered a tough first quarter in 2024, but that follows a very challenging comparison in Canada from the previous year's first quarter, which was 9%.

Your next question comes from the line of Mark Altschwager from Baird.

On Canada, it sounds like it's mostly a traffic issue and concentrated with the non-loyalty members. Has there been any material change in conversion and basket in Canada? I'm trying to get at the quality of supply or mix of goods, and how much that might be contributing.

We've noticed that the comparison and transaction flow are quite consistent, and there hasn't been a significant change in basket size since the comparison has essentially followed the transaction trends.

Yes. Mark, regarding supply, we have not noticed any change in the overall quality of supply. In fact, Canada has experienced strong forward momentum, especially in the first half of Q1 with growth in onsite donations, which typically leads to a favorable sales yield. So there has not been any noticeable change in quality in response to your question.

And in addition to the marketing you're planning, I think you mentioned in the prepared remarks, you have the opportunity to lean into some specific categories. Maybe just unpack that a bit more and remind us, how do you go about concentrating your production in certain categories, given that most of the donations are more raw, unsorted goods?

Yes. We have around 200 categories in our stores, and while some perform consistently well, like men's jeans, others have lower sales rates. Given the current economic situation in Canada, those categories with lower sell-through are now experiencing even lower sales, including women's capris and women's long-sleeve knits. Our store teams will adjust by reducing the display of certain categories. We’ll continue to put out our usual stock in the morning, but after lunch, we stop displaying long-sleeve knits. It's quite straightforward. The important part is to assess the situation appropriately at each store level because some stores are still successfully selling women's long-sleeve knits. We wouldn’t want to restrict inventory in those locations or reduce staff related to those items. The focus needs to be precise and actionable, similar to the example I provided.

Your next question comes from the line of Bob Drbul from Guggenheim.

I guess, I was just wondering if you could spend some more time just on the onsite donations. The numbers up there are pretty good these days, and sort of where you see that trending. And I'm just curious if you can give us an update around the GreenDrop and just sort of the plans there and how that's going. And then, I was also just curious, just would the GreenDrop initiative be something you could also use in Georgia with the 2 Peaches acquisition?

Yes, the teams in Canada and all three countries are performing exceptionally well with onsite donations. Convenience is crucial, and the primary reason new donors visit our centers is simply because they saw a sign. The second reason for their visits is advocacy; friends or family have recommended our quick and friendly service. Our teams track donor satisfaction scores to ensure that we are providing the best experience possible. We expect onsite donations to continue growing over the long term, even if there are minor fluctuations. Regarding GreenDrop, it's performing well, and we're finding that educating municipalities about the staffed model is important. New locations are exceeding our expectations in terms of quality, volume, and unit cost, and we plan to open 20 to 25 this year. Additionally, we currently have an oversupply of raw materials, which is advantageous for us, and we periodically manage this surplus. Concerning the 2 Peaches acquisition and GreenDrop's potential in Atlanta, our priority is to transition those stores effectively. We appreciate the existing supply channels but also see an opportunity to enhance both store performance and supply acquisition strategies.

Your next question comes from the line of Mark Petrie from CIBC.

Just quickly on Canada, any regions outperform or underperform, or did you see any variance across sort of urban or suburban or major markets versus smaller markets?

No, we've not seen any particular, either regional or urban/suburban trends.

Yeah, pretty consistent, Mark, especially on a 2-year stack basis, normalizing for odd weather.

And curious if you're seeing any shift of labor availability in any of your markets, and I guess specifically in Canada, just given, as you acknowledged the sort of shifting or weakening economy?

Yes, it's a good question, Mark. I mean, what I would say is what's great for us, and this applies to all 3 countries, is going all the way back to January of 2023, until this point in time, we have seen our turnover decline sequentially. And again, Mark has talked about this in the past in terms of engagement scores. We feel good about that. From a vacancy perspective, it's held pretty steadily. So, it varies by market, Mark, but on the whole, at a country level in Canada, labor availability is not holding us back in any way.

There are no further questions at this time. I will turn the call over back to you, Mr. Walsh.

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

Ladies and gentlemen, thank you for participating. You may now disconnect.