Savers Value Village, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended September 30, 2023, compared with periods ended October 1, 2022. Although the request metadata says 2022 Q3, the filing itself is for 2023 Q3. Figures below are in U.S. dollars.
Business context
The company operates 321 thrift stores in the U.S., Canada and Australia, selling secondhand merchandise through retail and wholesale channels. Its model depends on sourcing donated goods through nonprofit partners and donation centers, processing those goods, and selling them in stores or to wholesalers.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | 39 weeks 2023 | 39 weeks 2022 |
|---|---|---|---|---|
| Net sales | $392.7m | $378.3m | $1,117.5m | $1,070.4m |
| Operating income | $20.3m | $65.7m | $105.0m | $160.1m |
| Operating margin | 5.2% | 17.4% | 9.4% | 15.0% |
| Net income (loss) | ($15.6m) | $15.5m | $9.2m | $58.3m |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $104.4m | $117.6m |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $74.6m | $80.6m |
- Sales and operations: Q3 reported sales grew 3.8%; constant-currency sales grew 5.0%. Comparable store sales increased 3.7% (U.S. 3.3%; Canada 4.3%). Retail sales rose 4.3%, while wholesale sales fell 5.3%. The company opened three stores during the quarter and ended with 321.
- Profitability: Q3 Adjusted EBITDA, a non-GAAP measure, increased 6.3% to $91.0m; its margin rose to 23.2% from 22.6%. Adjusted net income was $26.5m, or $0.16 per diluted share, versus $29.9m, or $0.20, in the prior-year quarter. These adjusted results exclude specified items and should be considered alongside GAAP results.
- Cash and liquidity: September 30 cash was $125.3m, versus $112.1m at year-end 2022. Current assets were $208.3m and current liabilities $223.3m. The company reported $73.8m available on its revolving facility, with no revolver borrowings and $1.2m of letters of credit outstanding. Management said cash and expected operating cash flow should meet needs for the next 12 months.
- Debt and interest: Debt face value was $818.3m: $495.0m of 9.75% secured notes due 2028 and $323.3m under the term loan facility. Net long-term debt carrying value was $783.3m. The weighted-average debt interest rate was 10.16% in Q3, versus 7.77% a year earlier. A 1 percentage-point increase in Term SOFR was estimated to add $3.2m to annual interest expense; swaps reduced the company’s interest-rate exposure by 85.1%.
Material changes versus prior periods
- Q3 operating income fell $45.3m year over year, and the company reported a GAAP net loss, despite higher sales. Salaries, wages and benefits rose $48.0m, principally due to $48.3m of IPO-related stock compensation recognized in the quarter. This included $28.0m for options vesting upon the IPO and $19.2m of ongoing option expense.
- For the 39-week period, interest expense increased $25.1m to $70.9m, reflecting higher variable rates and the 9.75% notes, partly offset by debt repayments. A $16.6m debt-extinguishment loss also reduced reported earnings.
- Sales yield improved to $1.50 per pound in Q3 from $1.42, which management attributed to supply quality, a higher mix of on-site donations and pricing effectiveness. Pounds processed declined to 249m from 255m. Merchandise cost per pound rose to $0.64 from $0.60, mainly due to labor and material costs.
- Operating cash flow declined $13.2m for the 39 weeks, mainly because of higher interest paid and a $24.1m special bonus and related taxes. Cash used in investing activities was $75.4m, primarily for property and equipment.
Outlook, commentary, risks and unusual items
- The filing provides no quantified forward guidance. Management cited growth in comparable sales, transactions, sales yield and store count, while noting foreign-exchange pressure and higher labor and processing costs.
- In February 2023, the company issued $550.0m of 9.75% secured notes, used proceeds to repay term debt, and paid a $262.2m special dividend plus a $23.6m one-time bonus to certain employees and directors. The IPO subsequently generated $295.0m of net proceeds; those proceeds and cash were used to repay $252.4m of term debt and redeem $55.0m of notes, resulting in a $10.6m extinguishment loss. The company said it does not anticipate regular cash dividends in the foreseeable future.
- On November 9, 2023, the company authorized a share repurchase program of up to $50.0m through November 8, 2025. It is discretionary, may be changed or ended, and no Q3 shares were repurchased.
- After quarter-end, the company was awarded $4.3m in fees and costs in the Washington Attorney General litigation and received the funds November 8, 2023; it intends to donate $1.0m to charitable funds. The filing states there were no pending significant legal proceedings management believed would materially adversely affect its financial position.
- Disclosure controls were deemed ineffective as of September 30 because of material weaknesses involving technical accounting and SEC-reporting expertise, defined finance roles and documented IT general controls. Management described remediation efforts, but warned that failure to remediate could affect reporting reliability or lead to restatement.
- Key risks include sourcing enough quality goods at attractive prices, labor availability and wage inflation, consumer demand and competition, foreign exchange, variable-rate debt and refinancing, lease obligations, cyber and privacy risks, and the identified control weaknesses. A union at one Ontario store was bargaining over a collective agreement.
Important facts for investors to verify
- Whether sales-yield gains and comparable-store growth persist while pounds processed decline and cost per pound rises.
- How much of the earnings decline reflects recurring operating costs versus IPO stock compensation, the special bonus, and debt-extinguishment charges; review both GAAP and non-GAAP reconciliations.
- Debt-service capacity, future variable interest rates, covenant headroom and access to the revolving facility.
- Progress in remediating the material weaknesses and whether disclosure controls become effective.
- The effect of the $50m repurchase authorization on liquidity and capital priorities, given leverage and the company’s stated lack of near-term dividend plans.