Savers Value Village, Inc. — Form 10-Q Summary
Reporting-period note: The request identifies 2022 Q2, but the supplied filing is for the 13 and 26 weeks ended July 1, 2023, compared with periods ended July 2, 2022. This summary covers the filing provided.
Business context and reporting period
Savers Value Village operates thrift stores in the U.S., Canada and Australia and sells secondhand merchandise at retail and wholesale. It reported 318 stores at July 1, 2023. The filing is unaudited. Its IPO closed July 3, 2023, immediately after the reporting period.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $379.1m | $364.7m | $724.8m | $692.1m |
| Operating income | $68.9m | $61.4m | $84.6m | $94.4m |
| Net income | $35.1m | $30.9m | $24.9m | $42.8m |
| Net income margin | 9.2% | 8.5% | 3.4% | 6.2% |
| Diluted EPS | $0.24 | $0.21 | $0.17 | $0.29 |
| Adjusted EBITDA (non-GAAP) | $89.3m | $85.3m | $148.3m | $137.0m |
| Adjusted EBITDA margin (non-GAAP) | 23.5% | 23.4% | 20.5% | 19.8% |
Q2 sales grew 4.0% reported and 6.2% at constant currency; comparable-store sales rose 5.5%. First-half reported sales increased 4.7% and constant-currency sales increased 7.3%. Q2 operating margin improved to 18.2% from 16.8%, while first-half operating margin fell to 11.7% from 13.6%. First-half earnings included a $24.1m dividend-related employee/director bonus and $6.0m loss on debt extinguishment.
Q2 cost of merchandise sold rose to 40.9% of sales from 40.3%, reflecting labor and material costs. First-half salaries, wages and benefits rose 21.6%, largely due to the one-time bonus; corporate expense also increased with public-company readiness and growth investments. Q2 sales yield rose 8.0% to $1.49 per pound, while pounds processed declined 3.9% to 246m.
For the first half, operating cash flow was $53.8m, capital expenditures were $47.2m, and cash ended at $111.6m, versus $81.0m a year earlier. At July 1, debt face value was $1.13bn, including $550m of 9.75% secured notes; net long-term debt was $1.08bn. Cash and current assets were $221.3m against current liabilities of $245.1m. The company reported $68.8m available under its revolving facility at period end.
Material changes and subsequent events
- February’s $550m notes issuance funded a $233.4m term-loan repayment, a $262.2m dividend to equityholders and a $23.6m one-time bonus to certain employees and directors.
- On July 3, after quarter end, the company completed its IPO: 18.8m primary shares at $18 per share, generating $305.7m net proceeds. Existing holders also sold 6.9m shares; the company received no proceeds from those sales.
- IPO proceeds and $5.9m of cash were used to redeem $55m of notes, repay $252.4m of term loans and repay the $5m revolving-credit advance. The transactions resulted in a further $10.6m debt-extinguishment loss. These repayments occurred after the balance-sheet date.
- Q2 net income and operating income improved year over year, but first-half net income declined as substantially higher interest expense and the bonus outweighed sales growth. First-half interest expense, net, rose 77.6% to $52.2m.
- After the IPO, approximately $28m of compensation expense was associated with performance options that vested; about $126m of unrecognized expense for remaining options is expected to be recognized in future periods.
Outlook, risks and contingencies
Management said cash on hand and expected operating cash flow should meet liquidity needs for the next 12 months, with the revolver available as a supplement. The filing provides no specific sales or earnings guidance. Key exposures include secondhand-goods supply and quality, labor and wage inflation, consumer demand, store and processing capacity, foreign exchange and variable interest rates. Management estimated a 1% increase in Term SOFR would add $5.8m to annual interest expense based on July 1 balances; swaps reduced exposure to rate movements by 47.6%.
Disclosure controls and procedures were deemed ineffective at July 1 because of material weaknesses involving technical accounting and SEC-reporting expertise, defined finance/accounting roles, and evidence of effective IT general controls. Management described remediation efforts, including additional hires and external advisers, but warned remediation may not be successful. The company reported no pending significant legal proceeding it believes would materially adversely affect its financial position; the Washington Attorney General matter had been decided in the company’s favor, with a fee-and-cost motion filed July 6.
Important facts for investors to verify
- Confirm the intended period: the supplied report covers Q2 2023, not Q2 2022.
- Assess post-IPO debt balances, cash interest burden and liquidity after the July repayments; the reported July 1 balance sheet predates those transactions.
- Evaluate whether sales-yield gains and comparable-store growth persist as processed pounds fell and labor/material costs rose.
- Track the material-weakness remediation and any subsequent changes in disclosure controls or financial reporting.
- Monitor future expense recognition for stock options, including the disclosed $126m of unrecognized compensation expense.
- Consider the company’s substantial debt, covenant restrictions, foreign-exchange exposure and Ares’ control of the company.