Savers Value Village, Inc. (SVV) Earnings Call Transcript & Summary

Good morning, thank you for taking time to visit with Savers Value Village First thing. Happy New Year. I'm Mark Walsh. For those of you who don't know me, I'm the CEO of Savers. We'll jump to our fourth quarter results. And let me kick off the meeting with a quick update on our fourth quarter results, which were really solid and highlights include $465 million in sales or a 15.6% increase from prior year and at the high end of our guidance, 5.4% enterprise comp with an 8.8% increase in the U.S. and a 0.7% increase in Canada. The strength of that U.S. number speaks to our core store comp momentum and really doesn't have a significant impact from the new store classes in '23 or '24. That said, the new store classes in '23 and '24 are really right on top of our expectations and meeting our guidance. So we're really pleased about that as well, just a separate point. We opened 10 new stores in the quarter, putting us at 26 for the year. The power of our cash-generative model, which Michael loves to talk about, was on full display again. And in the fourth quarter, we repaid $20 million of debt and repurchased 1.1 million shares at an average price of $8.75. And lastly, and most importantly, we are reaffirming our earnings guidance. As we turn the page into 2026, Savers is really at a key and exciting inflection point. I really love this slide. The 6 points highlighted on this page, both independently and collectively present a unique moment in our strategic journey. First, secular adoption of thrift continues to accelerate, and we certainly believe that the cost of living pressures are aiding this trend. Second, as we have mentioned in a number of our quarterly calls, and we'll talk about this more in a couple of slides, our customer continues to get younger and more affluent. Third, as evidenced by what I just said on the first slide, our comp momentum is strong. We're pleased with posting a 5.4% enterprise comp and not to use too aggressive an adjective, but we're really pumped up about the 8.8% comp in the U.S. New store trajectory, that's our fourth point. This is -- if there's one thing I'd like to leave you with today, our new store trajectory remains strong. It's gaining traction and we're poised for positive adjusted EBITDA contribution in 2026. This is critical to that financial inflection that both I and Michael will be talking about throughout the presentation. Number five is innovation. We continue to be very innovative, and we will -- that trend is going to continue into 2026. And finally, all of this is underpinned by a balanced capital allocation strategy that enhances shareholder value, and Michael will go deeper on this topic in his portion of the presentation. So for those of you who are unfamiliar, and I think it's very few in the room, but for those of you who are less familiar with our business model, it's unique. It's one we're very proud of, a couple of key metrics. We're the #1 for-profit retailer in North America, which obviously provides significant scale advantages. We operate 367 stores in 3 countries and clicking down into the U.S., there is a tremendous white space opportunity for us as we're underpenetrated and have significant momentum. Value, value value at $5 -- approximately $5 AUR value screams. We've got over 6 million active loyalty members, close to $1.7 billion in sales. And LTM through the third quarter, we've got $249 million of adjusted EBITDA. And our mission really sets us apart from anything you'll hear today. At best, we champion reuse and hopefully inspire a future where secondhand is second nature. And the proof of that is on the numbers on the slide. In the last 5 years, we paid our nonprofit partners $490 million for secondhand clothing and housewares that we accept on their behalf. And equally impressive, in the same period, we kept 3.2 billion pounds of our reusable goods out of North American landfills. And Jubran came up with this quick stat. That's the equivalent of 80 municipal garbage trucks every day for the last 5 years. It's kind of mind-blowing. Thrift or more broadly, the reuse economy continues to grow, and it becomes more mainstream. We're seeing it every day across all 3 countries as it is a very cool cross-section of the local landscapes that we're serving. Now we talk about value a lot, and I hope this slide sort of jumps out at you. We can't emphasize the value that we're delivering. And I mentioned value earlier in that approximate $5 AUR. If you compare that to other value retail experiences, the numbers on this page jump off at you. It's exceptional value, really exceptional. And just as impressive is -- and we didn't put a lot about this on the page, but our adjusted EBITDA margins, which are in the mid-teens. So to deliver that value and the adjusted EBITDA margins is quite impressive. So in the last couple of quarters, we've been talking a lot about our ability to meaningfully add loyalty customers in 2 critical cohorts. So I want to take a little bit of time where are we on that journey? And I think the numbers presented on this page emphasize where we are, and this is based on our current U.S. loyalty data. So approximately 40% of our customers are under the age of 45 and 45% of our customers reside in households earning over $100,000. So you think about our long-term algorithm and the opportunity to grow, we really love these data points to support that long-term growth algorithm. So to talk about longer term, how do we think about our strategic and financial plans. And our framework is directed, it's more importantly, actionable, and it's really built on 3 pillars. First is growth. The second is innovation, and the third is that balanced capital allocation. Now I'm going to talk about the first 2 pillars, and Michael is going to do a deep dive on the third. Let's start with growth. And as this map clearly indicates, we certainly have a significant new store opportunity in the U.S. as we are essentially underpenetrated in every U.S. state. Since 2022, we have built a team to deliver on this very important element of our strategy. Progress has been steady. And more importantly, it's been very successful. As our new store count started at just 8 in 2022, we opened 26 in 2025, and we have a very confident and comfortable target of 25 in 2026. I think the biggest takeaway about where we were and where we've been is as we've honed our new store approach, the key difference in 2026 is going to be that the growth is U.S.-centric. So 85% to 90% of our new stores are going to be in the U.S. rather than in the mix of the 3 countries. And what's also very interesting is as part of that strategy or part of that focus within the U.S., we will start to enter new strategic adjacent markets in both North Carolina and Tennessee. This is probably the most important slide I'm going to talk about before I hand it over to Michael. So for SVV, the slide illustrates an exciting moment in our strategic journey. Let me kick off by reiterating that our new stores in each one of our new store cohorts is performing in line with expectations. Obviously, it makes us very happy with that data point. As a result, 2026 is really now the inflection point in profitability where new stores contribute to profitability. And this chart is really a good illustration of that point. So let me walk you through the last couple of years. So in 2023, we started with a small number of stores. The combination of our solid comp performance and limited new store openings resulted in strong profit contribution growth. As we accelerated new store growth into 2024, the profit contribution fell as new stores and the associated cost of opening and operating them impacted our short-term profit trajectory. In the third quarter of '25, we very importantly turned the corner on profit growth in both the U.S. and in Canada and a power -- a really powerful proof point that our new stores are gaining traction. Our guidance complement -- I'm sorry, our guidance contemplates adjusted EBITDA growth in the fourth quarter, the first quarter of adjusted EBITDA growth since we accelerated our new store trajectory. Again, so this is all about that profit inflection and our new stores delivering to the growth. So looking ahead, Canada and U.S. create a powerful combination of growth opportunity and strong cash flow generation. As articulated throughout the U.S. is our primary source of new store growth. With an underpenetrated footprint and a strong secular trend, our value in store experience as evidenced by the 8.8% comp that we delivered in the fourth quarter, the U.S. focus is all about growth. Canada has best-in-class customer -- consumer awareness and a highly generative cash flow model. We think about this. We love this combination of opportunities and core strengths in both models to deliver our long-term algorithm. A critical component of our growth story that I have not mentioned is our powerful and very successful donation efforts. With 76% of our donations coming directly from the donor, our donation growth rates have increased at a higher rate than our retail comps. A quick aside, our new store team spends a lot of time analyzing the donation opportunities of a new location as they do a retail equation. So success in delivering the tandem goals of great retail and donation experiences manifests in outsized financial returns for those new environments. So now I'll move on to innovation. Over the last 7 years, no one has been more innovative in brick-and-mortar thrift than Savers, but there's still a lot to do. And our innovation approach is centered on 3 core items. First is price value. In an environment where we put out 34,000 new items in every store, every week, how do we optimize that price value equation to drive improved revenue realization. The second is around cost efficiency with a model that employs significant hourly labor. How do we utilize technology and industrial engineering to create a constant flow of cost and process improvements. And finally, data science and insights. Our data set is massive. And there is an enterprise-level effort through data science and potentially agentic tools to drive insights and savings that will propel our business for the next decade. After a highly successful implementation of automated book processing or as we call it ABP to around half of the fleet, we engineered a solution. This is a good example. I'm sorry to rush it because I'm running out of time, and Michael has got a lot to say. So as a good example, we engineer a solution to serve the balance of our stores in ABP Lite. And it's a great example of these -- 3 of these innovation pillars coming together, designed to maximize the revenue opportunity and merchandising execution, the store-level deployment, one, scans a title and genre of a book and allows for library-like merchandising. It prices the book in seconds by connecting to a 50 million title of library of used books. It delivers more than 15% in production cost improvements, moving the book from donation bin to the sales floor, and it maximizes revenue by removing the subjectivity of pricing. And I'll leave this with you. This is just the beginning of our innovation pipeline. With that, I'd like to thank you very much for your interest early in the day, and I'll turn it over to my colleague and our CFO, Michael Maher.

Thank you, Mark. Okay. I'm going to move on now and talk about our third pillar, capital allocation, and we continue to take a balanced approach here. So our first priority is investing in our business. We continue to believe that new store growth is the highest and best use of our capital. Next is strengthening our balance sheet. We're reducing our leverage ratio through a combination of earnings growth and debt reduction. And finally, we're opportunistically returning capital to shareholders via share buybacks. And as Mark indicated, we've got strong cash flow generation that enables us -- that has enabled us to fully self-fund all 3 of these priorities for each of the last 2 years. So let's take them one by one. So we'll start with investing in our business. We expect capital expenditures to be a high single-digit percentage of revenue with approximately 2/3 of that for growth investments like new stores and related investments and about 1/3 for maintenance. I want to double-click on the new store investment, and this will be a refresher for some of you. We first put this up here last year, but it's important to the model and some of the remarks that Mark made earlier. So we typically spend around $1.5 million to $2 million in capital on a new store. And we opened with first year sales averaging around $3 million and a modest operating loss. We're typically profitable by the second year. And by the fifth year, we average around $5 million in sales and a 20% 4-wall contribution margin. So that's important because as Mark discussed, we only recently began this current new store growth phase. And that means our new stores are still early in this cycle. They're still mostly in years 1 and 2. And that's been a headwind to our earnings for the last couple of years. But as those earlier cohorts mature, move later into the cycle, that headwind is beginning to abate. And so we believe 2025 is the trough for EBITDA margin, and we expect collectively new stores to start contributing to EBITDA growth beginning in 2026. So let me turn now to our other 2 priorities, starting with strengthening our balance sheet. We've repaid $120 million in debt since our IPO, including $20 million in the most recently completed quarter. Now as some of you will recall, in September, we refinanced our debt, which had several meaningful benefits. First, $17 million in annualized interest savings, $55 million in increased liquidity through an expanded revolving line of credit, maturities extending to 2032 and increased flexibility for continued debt reduction. We're aiming for a leverage ratio of approximately 2 times by the end of 2027. With regards to returning capital to shareholders, over the last couple of years, we've repurchased 8.4 million shares of our stock at a weighted average price of $9.15, including the 1.1 million shares Mark mentioned in the fourth quarter at a weighted average price of $8.75. As of the end of the year, we still had $42 million remaining on our share repurchase authorization, and we will continue to be opportunistic about share buybacks. All right. So as Mark described it, those 3 pillars: growth, innovation and capital allocation support and drive our long-term financial targets, which are low single-digit comp store sales growth, which is comprised of the U.S. a little better than that, mid-single-digit growth in the U.S. and Canada, our more mature market in the lower low single digits. We expect to continue to open approximately 25 new stores per year, driving high single-digit total revenue growth. We expect adjusted EBITDA margins in the mid-teens in the near term, building to high teens in the longer term as those new store cohorts continue to mature. And we expect adjusted EPS growth to equal or exceed our revenue growth as we continue to grow EBITDA, pay down debt, thereby lowering interest and buy back our shares. So in summary, we think Savers Value Village is well positioned to win. We've got a unique category tailwind with thrift outpacing traditional retail and our customer continuing to get younger and more affluent. We've got a durable and growing source of supply with on-site donations continuing to grow as a percentage of our overall supply mix. Our new stores are gaining traction, contributing to EBITDA growth beginning in 2026. We've got a proven innovation engine with opportunities to further sharpen our price value equation and drive labor efficiency through technology. And we've got a highly cash-generative model that allows us to fully self-fund our new store growth, reduce our debt and return capital to shareholders. So we're really excited about the opportunities in front of us in 2026 and longer term. Thank you again for your interest in Savers Value Village, and we look forward to meeting with many of you over the course of the day and tomorrow. Thank you.