Savers Value Village, Inc. Q2 FY2025 Earnings Call

Good afternoon, and welcome to Sabre's Value Village conference call to discuss financial results for the second quarter ending June 28, 2025. 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 following disclosures of the 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 these statements are current only as of the date of this call. 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 direct comparable GAAP financial measures can be found in today's earnings release and the SEC filings. Joining from management on today's call are Mark Walsh, Chief Executive Officer; Jubran Tanious, President and Chief Operating Officer; Michael Maher, Chief Financial Officer; and Ed Yruma, Vice President of Investor Relations and Treasury. Mr. Walsh, you may go ahead, sir.

Thank you, and good afternoon, everyone. We appreciate you joining us today. We are very excited about our second quarter results, which reflect our strong execution and serve as another proof point that our sharp value and compelling assortment resonate strongly with our consumers. Let me start with a few highlights from the quarter. Sales in our U.S. business grew 10.5%, with comparable store sales up 6.2%, driven by both transactions and average basket. These results underscore the long-term growth opportunity in front of us. In Canada, our business continues to make progress in 2025, delivering 2.6% comparable store sales growth, an acceleration of 200 basis points from the prior quarter, marking a third consecutive quarter of sequential improvement. Despite a prolonged choppy Canadian macroeconomic environment, our Canadian consumer is responding favorably to our fresh assortment and strong value proposition. We opened 4 new stores in the quarter and now expect to open 25 new stores in 2025. As a class, our new stores continue to perform in line with our expectations, delivering strong unit economics. We remain confident in our long-term store growth opportunity and a targeted 20% store level contribution margin. Turning to our loyalty program. We reached a milestone with over 6 million total active members. Financially, we generated nearly $69 million of adjusted EBITDA in the quarter or approximately 16.5% of sales. Finally, based on our first half results, we are raising our revenue and earnings outlook for 2025. Michael will provide additional details on our outlook in his remarks. Parsing our results by geography, let's start in the U.S. where our performance was especially strong. The team has been disciplined in execution, value selection, a really unique thrift environment. Consumers are responding as we continue to drive market share gains. The obvious question is which demographic is driving our growth? Is it trade down, secular tailwinds or some combination? The data set we have compiled from our insight work tells us an interesting and compelling story. Based on our survey work, consumers are increasing their spend with us, driven by our value proposition and customer experience. In addition, over the last several quarters, our customer base has been getting younger and more affluent with a growing propensity to shop with us that is not driven by their economic circumstances. This speaks to the powerful and durable secular trends driving higher adoption of thrift. Helping to fuel this further, our competitive field research indicates price gaps to discount retail between 40% and 70%. This is prior to any tariff impact. If upward pressure on new retail pricing intensifies, we believe that we have a unique opportunity to introduce new customers to the great value and shopping experience that Savers offers. We think value always wins, but value is even more important in an environment where consumers continue to stretch their dollars. In short, we believe near-term economic pressures are accelerating a longer-term secular tailwind that was already underway in the U.S., further highlighting the growth opportunity in front of us. We believe our exceptional treasure hunting experience punctuated by a compelling combination of value and selection serves all cohorts across the economic spectrum. In Canada, we led with a strong and compelling selection. The consumer responded well as our basket growth is indicative of our delivery of value and selection. Our team has worked tirelessly using a data-driven approach to optimize our offering at the store level, and it is paying off with our third consecutive quarter of comparable store sales improvement. All things considered, macroeconomic conditions were stable in Canada during the second quarter, and we have seen green shoots as election-related turbulence has settled down. However, unemployment and inflation remain elevated and consumer confidence is volatile amid ongoing trade and tariff uncertainty. That said, we are encouraged by consumer behavior to date as basket size and transactions have been trending favorably, and we have seen sequential improvement across all regions. As indicated after the first quarter, we are far from declaring victory and still have work to do navigating a challenging economic landscape, but are pleased with the progress we continue to see in the business. Moving on to new stores. We are very excited about our accelerating square footage growth, which will be more U.S.-centric going forward. We opened 4 additional new stores in the second quarter and are refining our guidance to 25 new stores in total for this year. New stores have been performing in line with our expectations and remain our first and best use of capital to drive growth and compelling returns. Given the ongoing momentum in our business, we are making near-term tactical investments. These investments are focused on initiatives to enable sustainable long-term growth. In Canada, higher production levels are improving assortment, more great finds drive more repeat visits. This investment in processing and selection has had a transitory impact on our Canadian profit margin, which we expect to normalize over the next few quarters. In the U.S., we accelerated our investment in the Southeast, pulling forward our planned 2 Peaches rebranding and repositioning efforts, completing the conversion of all 7 stores on an accelerated schedule. We continue to believe this modest investment will give us a beachhead for ongoing expansion into the region. Furthermore, we continue to embrace innovation and are exploring new technologies and processes to optimize our business performance. For example, after seeing strong financial returns in our rollout of automated book processing or as we call it ABP, we've now expanded ABP to supply nearly 50% of the fleet. I would like to conclude my remarks by thanking our more than 22,000 team members for their extraordinary performance thus far, which is reflected in our financial results. Without our people, we would not be in this position as we continue to pursue our mission of making secondhand second nature. The first half of 2025 has been a success as we have exceeded our expectations thus far. And while macroeconomic pressures persist, I believe that strong execution, fresh assortment and exceptional value positions us well. I'll now hand the call over to Michael to discuss our second quarter financial performance and the updated outlook for the remainder of 2025.

Thank you, Mark, and good afternoon, everyone. As Mark indicated, we had a strong second quarter. Total net sales increased 7.9% to $417 million. On a constant currency basis, net sales increased 8.5% and comparable store sales increased 4.6%. We are especially pleased with our double-digit growth in the U.S., where net sales increased 10.5% to $229 million. Comparable store sales increased 6.2%, driven by both transactions and average basket. Our U.S. business continues to outperform our broader off-price retail peer group as we benefit from thrift adoption with a growing customer base that is trending younger and with higher household income. We are also encouraged by our continued sequential improvement in Canada, where net sales increased 3.4%. On a constant currency basis, Canadian net sales increased 4.7% to $157 million and comparable store sales increased 2.6%, fueled by an increase in average basket and transactions. This reflects the initial benefits of our execution in Canada as consumers react favorably to our increased selection. Cost of merchandise sold as a percentage of net sales increased 270 basis points to 44.8%. The increase primarily reflects higher processing levels in Canada and the impact of new stores. Our rebalanced Canadian production levels are driving sales by providing a better selection to our customers while creating some short-term pressure on our gross margins. We anticipate improved flow-through to the bottom line as demand continues to build and production levels are optimized. These cost increases were partially offset by the favorable impact of year-over-year growth in on-site donations. OSDs plus GreenDrop accounted for 79% of supply versus 78% last year. Salaries, wages and benefits expense was $87 million. Excluding IPO-related stock-based compensation, salaries, wages and benefits as a percentage of net sales increased 30 basis points to 18.7%. The increase was driven primarily by new store growth and an increase in incentive compensation expenses. Selling, general and administrative expenses increased 6% to $88 million, primarily due to growth in our store base. As a percentage of net sales, SG&A decreased 40 basis points to 21.2%, primarily due to continued expense discipline. Depreciation and amortization increased 20% to $21 million, reflecting accelerated amortization of certain acquisition-related intangible assets, investments in new stores, off-site processing and information technology. Net interest expense increased 1% to $16 million, primarily due to the impact of unwinding our interest rate swaps last year, partially offset by reduced debt and lower average interest rates. GAAP net income for the quarter was $19 million or $0.12 per diluted share. Adjusted net income was $23 million or $0.14 per diluted share. Second quarter adjusted EBITDA was $69 million and adjusted EBITDA margin was 16.5%. U.S. segment profit was $49 million, up $0.5 million versus the prior year, primarily due to increased profit from our comparable stores, partially offset by the impact of new stores and the 2 Peaches conversions. Canada segment profit was $39 million, down $5 million versus the prior year period due to deleveraging of expenses as a percentage of sales, primarily associated with our efforts with Canadian production to build demand as well as a weaker Canadian dollar. Our balance sheet remains strong with $71 million in cash and cash equivalents and a net leverage ratio of 2.5x at the end of the quarter. We repurchased approximately 2.7 million shares of our common stock during the quarter. Of this total, 2.3 million shares were purchased at a weighted average price of $8.86 per share as a part of the secondary offering in May. We also purchased 0.4 million shares under our share repurchase authorization at a weighted average price of $8.17 per share. As of the end of the second quarter, we had approximately $2.8 million remaining on our share repurchase authorization. Finally, I'd like to discuss our updated outlook for the remainder of fiscal 2025. We have exceeded our expectations for the first half with strong U.S. comps and continued sequential improvement in Canada. New stores are meeting our expectations, putting them on track to begin contributing to profit growth in 2026, consistent with our previously stated goal. Our profit margins reflect the short-term tactical investments we're making in higher processing levels in Canada and accelerating the conversion of 2 Peaches locations to our operating model. Additionally, a stronger Canadian dollar is contributing to better total sales results, but with limited short-term earnings impact due to hedging. Based on these factors and the momentum we are seeing in our business, we are raising our previously stated outlook for the year. Our updated full year outlook for 2025 now includes the following: net sales of $1.67 billion to $1.69 billion; comparable store sales growth of 3% to 4.5%; net income of $47 million to $58 million or $0.29 to $0.36 per diluted share; adjusted net income of $67 million to $78 million or $0.41 to $0.48 per diluted share; adjusted EBITDA of $252 million to $267 million, capital expenditures of $125 million to $140 million and 25 new store openings. Our outlook for net income assumes net interest expense of approximately $67 million and an effective tax rate of approximately 30%; for adjusted net income, we're assuming an effective tax rate of approximately 27%. I'd also like to briefly touch on the expected cadence of results for the third and fourth quarters. We expect sales growth in the third quarter to be roughly consistent with the second quarter, with total sales growth in the high single-digit percentage range and comparable store sales growth in the mid-single digits. We plan to open 10 new stores during the quarter. We expect fourth quarter total sales growth in the mid-teens percentage range, including the impact of the 53rd week, with comparable store sales growth in the low single digits as we begin to lap stronger comparisons. We expect adjusted net income and adjusted EBITDA in dollars to be roughly balanced between the third and fourth quarters, with the fourth quarter slightly higher than the third quarter. This concludes our prepared remarks. We would now like to open the call for questions.

Congrats on a nice quarter. So Mark, could you elaborate on the cadence of the second quarter same-store sales maybe across the U.S. and Canada? How you've seen momentum progress into the third quarter? And Mark, just taking a step back, how much of the inflection do you attribute to the team's execution relative to macro improvement?

Thanks for the question, Matt. Let's start in the U.S. Look, the U.S. business was very strong. I think the team executed our strategy exceptionally well, delivering that sharp price value, the elevated shopping experience and merchandising selection that delivered what our customers are demanding, resonated with consumers across the demographic spectrum, and that trend continued with increasing penetration in the younger and higher household income demographics. We're very pleased with that. You add to that execution, the secular trend, and ultimately, value is winning. We saw that in our transactions and our basket improvements. And I'd also add that the New York new store fleet has met its goal. So it's been a very, very satisfying quarter for us in the U.S. One final note on the U.S. business, and this goes actually for the Canadian business as well. Our team continues to provide that fast, friendly donation approach. As you heard, we're close to 80% OSD GreenDrop mix in terms of our supply. That's a fantastic place for us to be. Now the Canadian team had a little bit of a different executional challenge, and they rose to the occasion. We really focused our Canadian team on incremental efforts in meeting our thrifter's expectations on selection. And you combine that with the sharp value proposition, and again, this is... I'm sorry.

I'm sorry. Go ahead.

And the results of these efforts, I think you've seen the continued improvement in our business. The sales improvements by cohort were widespread, the lower end and the higher end of household income cohorts showed the most improvement, which is really a powerful indicator of our model strength and wide acceptance in Canada. And the younger cohort was also an area of growth. Just want to touch on, as indicated in the prepared remarks, we did invest in selection in this quarter. And as the Q3 starts, we are zeroing in on that equilibrium between items put out and items sold. I think the vertical integration of our model is one of the unique elements of our position in retail remains a strength of the company. Ultimately, the trend is continuing into July, and we love the momentum as we head into the third quarter. Michael, why don't you touch on the cadence of the comps that Matt asked.

Yes, Matt. So we saw comps accelerate pretty meaningfully in both countries beginning in May and continuing into June, and we've seen that trend continue to accelerate into July in both countries as well.

That's great information. Michael, could you elaborate on this year's 15.4% EBITDA margin guidance? How might we expect margin progression beyond this year if we continue to experience consistent low single-digit same-store sales? I'm aware of your new store maturity curve and want to grasp all the different factors involved.

For sure. Yes, Matt, as we've said many times that we believe our long-term algorithm includes high teens EBITDA margins. We continue to believe that. For the near to medium term, we'll likely be in the mid-teens, and that reflects the investments that we're making in new stores, which we're now in year 2 of that journey. As we continue to build out that pipeline, we expect margins to improve. That won't be overnight, but we do think our 2025 EBITDA margin is roughly the trough.

Mark, I was hoping you could elaborate on some of these transitory headwinds to margin that you're looking at seeing into the back half of the year that's weighing on the incremental flow-through from these really strong comps. Can you help us understand what those things are, how transitory they are? And then, Michael, could you quantify the impacts that we're seeing and how that phases through the year?

Yes, I appreciate the question, Brooke. I think Jubran will also provide some insights. After we reported our first quarter, as Michael mentioned, the business really took off, and we're excited about that acceleration. We seized the opportunity to enhance our improving trend in Canada by increasing our selection, which is one of the transitory issues we're referencing. We also accelerated our 2 Peaches conversion, which, while important, is not as significant as bolstering the trend in Canada. We believe these efforts will contribute to long-term sustainable growth. Michael can discuss the financial implications, but Jubran, could you take a moment to explain what we did in Canada regarding the selection?

Sure. Thanks, Mark. Yes, Brooke, as Mark mentioned earlier, we've seen sequential strengthening in Canada in terms of transactions and sales. And if you recall, where we were this time last year with some significant pullbacks in production and frankly, lessons learned from that, we wanted to feed the momentum. And when we produce at equilibrium, we're trying to match items to the floor to anticipated transactions. So as you think about the laps, as you think about the strengthening trend, it's sort of an inherently imprecise thing. And what we know is that it's hard to get it right on the pin, especially with a dynamic situation like that. But if we're going to err, we're going to err on the side of selection to the Canadian consumer. And that's exactly what we've done. So as we think about the remainder of the year and things start to settle down, certainly from a comp perspective, we'll be able to dial that production amount in to get more in line with equilibrium, if that makes sense. And then the second piece of that, that Mark mentioned is the 2 Peaches fleet. A reminder to the group, this was the acquisition that we made a little over a year ago, fairly modest 7-store chain in the greater Atlanta market to our overall P&L. But what it represents is a strategic beachhead for us as we look to expand in the U.S. Southeast and take advantage of that white space. So we converted the first 2 stores, sort of Savers them, if you will, bringing them up to our standards of selection and merchandising. And we took the opportunity to accelerate the conversion of the remaining 5 as we are currently actively prospecting new sites in the U.S. Southeast.

So Brooke, this is Michael. Just to speak to your question about financial impacts of that. We think Q2 is the peak impact. As Jubran just said, we're lapping the beginning of the pullback from last year, and we're the exact reverse of that this year. We're really on our front foot and driving volume. So we saw that play out last year in terms of obviously reduced demand in the third quarter. We expect to see the reverse of that improved sales trends in the third quarter of this year. As the trends sort of normalize going forward from here and we find that equilibrium, I would expect the second half gross margins to be much closer to last year than we saw in the first half.

Mark, based on the commentary so far, it appears there is greater visibility in the business and less volatility. Could you comment on that? Also, you mentioned positive aspects regarding transactions and basket size. Can you provide more detail on that? Regarding pricing, you indicated that if the industry shifts slightly on pricing while maintaining significant price gaps, considering you have a low average unit price of around $5, do you see an opportunity to achieve a boost in average unit retail without losing those price advantages? It seems like we are moving toward more visibility and opportunities to drive the business through transactions, basket size, and even average unit retail, with all aspects progressing well. Could you summarize your thoughts on these points?

Thanks for the question, Randy. Our team excels at identifying pricing opportunities. We consistently analyze competitive pricing, not just from our direct competitors but also from discount retailers. Our price gaps are significant, ranging from 40% to 70%. If these gaps were to increase, it would provide us with more options, which is advantageous and would allow us to capture more market share. Our strategy reflects our visibility into the business. We've identified investment opportunities and made swift decisions. Our strategic investment in selection in Canada, which has shown continuous improvement over three quarters, is a testament to this visibility. The team is focused on leveraging data to drive our business forward, as evidenced by a 6.2% comparable sales increase in the U.S. and three consecutive quarters of improved performance in Canada.

Super helpful. Michael, I have two questions for you. First, you provided guidance for EBITDA in the third and fourth quarters. Can you give us more detail regarding gross margin and SG&A to assist us with our modeling? Secondly, regarding the real estate market, we are hearing that supply is increasing. It seems like there should be more visibility and opportunities for you as we head into 2026 and 2027. Could you share your thoughts on that?

Sure. Thanks, Randy. I'll go ahead and take your question on the guidance and the cadence of that and then maybe let Jubran speak to real estate. So as far as the components of that guide, I would say, as I mentioned earlier, first of all, margin is going to be closer to last year in the second half overall. I would expect those comparisons to sequentially improve from Q3 to Q4, largely because we're continuing to see the new store class from last year mature, and that helps to provide a continuing and growing tailwind. As far as OpEx overall for the year, I expect that to be slightly better than last year as a percentage of sales. The OpEx dollars are a little bit lumpy by quarter in the second half. What I would say is that as a percentage of sales, I expect OpEx to be reasonably consistent between Q3 and Q4.

And then, Randy, this is Jubran. The new stores, yes, as Mark mentioned in the prepared comments, we're pleased with the new store performance that we have so far. We're also very pleased with the pipeline formation that we're seeing. So I think we've talked about this in the past, and I believe the momentum has continued. We're seeing good muscling up by the team. We're seeing high-quality deals come across. The conversation with landlords, we're seeing a good appetite from them in terms of the mainstreaming and realization that thrift can be a compelling part of their real estate mix. So absolutely, we are looking at high-quality deals. We are very pleased with the pipeline going into 2026, and we expect that to continue in the out years.

Yes, there has been no significant change. We have always believed that it will be between 25 and 30. Our aim is to pursue high-quality deals, and we are very confident about the 25. We anticipate next year to yield a similar number. However, there is nothing particularly significant about the midpoint of 25% to 30%. So, no, there is nothing systemic underlying any of that.

Okay. And then could you update us on labor costs and what you're seeing from an inflation perspective there at the front of the store? And then on the production side, what opportunities do you see to drive some greater efficiency as you execute on these higher production levels?

Mark, this is Michael. I'll take the labor cost thing and then let Mark speak to the production piece. So yes, I'd say fairly typical. Labor costs, they grow. Hourly labor cost, wages grow. They typically outpace inflation. This year is no exception, not particularly different, though, from our long-term averages.

I think on the production side, our approach is always to be innovative as we think about every part of our business. So we're constantly trying to improve our process. We are testing different approaches as we speak. They're not ready for prime time. But that clearly has a meaningful part of our cost structure, this is a point in which we really place a lot of emphasis. So as the quarters progress, we should be talking more about innovation as we progress down that path.

In the last several years, Savers has experienced a notable change in its profitability during the second half compared to the margin in the second quarter. Now, you are projecting a margin similar to that of the second quarter. Why is that? How much of the unexpected costs that affected the second quarter will continue into the second half of the year? Considering those unexpected costs and the challenges you faced in processing in Canada, are there any systems or investments you could make to enhance the way you forecast the business?

Michael, this is Michael. I will address the first part of your question regarding the second half margins. First, our overall outlook for the second half margins remains roughly the same as before. The significant change this year compared to previous years is the rapid growth of our new stores and how that affects our profit margins in the short term. As we mentioned before, that growth was backloaded last year, which is impacting our margins this year. We're entering the second year of that expansion and observing these stores reaching maturity. The good news is they are performing as we expected regarding that inflection, but it still affects our EBITDA margins. Other factors we discussed earlier, including the Canada processing and the conversions of 2 Peaches, had their peak impact in the second quarter, but we expect less impact as we move into the latter half of the year. Another element influencing our updated guidance and the change in sales versus EBITDA is the stronger Canadian dollar. At the start of the year, it was trading around USD 0.70, and now it's above $0.72, nearing $0.73 according to some forward rates. This situation affects our sales because Canadian business sales, when converted to U.S. dollars, are now on the rise. This accounts for nearly half of the additional sales reflected in our updated guidance midpoint compared to the prior guidance. While it doesn’t significantly impact the bottom line due to our hedging strategies, which are designed to limit short-term profit fluctuations from foreign exchange, a stronger Canadian dollar is beneficial for us in the long run, although its immediate effect on the bottom line in 2025 is minimal.

We are currently evaluating every process within our company to identify areas for improvement. Our objective is to enhance business profitability and increase our agility through technological and process advancements. This focus is integral to our company’s identity. Over the past five years, we have significantly transformed our thrift operations, and we aim to achieve a similar change in the next five years.

Selection or value selection seem to be a driver for strength in both the U.S. and Canada. I'm just wondering, is there anything to read into those comments or perhaps specific improvements on the processing side that could be translating to better sales?

Yes. Thanks for the question. This is Jubran. I would tell you that we are always looking to dial in what we put in front of the shopper for the particular time of year that we're in. So to give you a particular example, I think this group is familiar that we do backstock off-season product. And we have gotten better and better over the years as part of a continuous improvement effort that Mark has talked about to become more and more precise about putting the right thing on the floor in the right amount and at the right time of year. So as you think about, for example, a seasonal transition, well, we are not like typical retail where we do a wholesale flip, for example, we match customer preferences and slowly contract our out of season and expand our incoming season to match customer preference as we go. So I think that is just one example of several that allow us to become sharper and sharper in terms of our value proposition and selection to the shopper.

Yes. I believe we are a top-tier thrifter, where Directors expect a wide selection, competitive pricing, and freshness. We refresh our inventory 15 times a year, which is ingrained in our identity and sets us apart. This is what we and our shoppers anticipate from us.

Congratulations on a very strong quarter. My first question is about the original guidance, which included an estimated $10 million headwind due to having numerous mature stores. It seems like it takes longer for your stores to mature because you need to collect donations. Is that still the estimate reflected in your revised guidance?

This is Michael, Anthony. Yes, no change in that. The new stores are progressing according to our previous outlook.

Got it. It's great to see the improved performance in Canada. I recall that last year, part of the reason for reducing your inventory receipts there was significant. Can you share how much of the recovery in stock in Canada has been a positive factor? Has that positive effect continued or has it peaked at this stage?

I think after this last quarter, we've gotten selection where we wanted to be, as Jubran articulated, that delicate equilibrium is always something we're chasing. And I think we feel good about where we're starting the third quarter, and we feel good about the continued momentum into the third quarter, July in that particular aspect of our business.

And there are no further questions at this time. I'll turn the call over back to Mr. Mark Walsh for any closing remarks. Please go ahead, sir.

Thank you. And thanks, everyone, for your interest in Sabre, and we look forward to updating you on our second half progress in late October. Talk to you then. Thank you.

Thank you. This concludes our conference call for today. Thank you all for participating. You may now disconnect.