Savers Value Village Inc

NYSE:SVV

Earnings Call Analysis

Company Posts Solid Growth with Optimistic Outlook

In 2023, the company delivered robust results with $1.5 billion in revenue and $322 million in adjusted EBITDA, opening 12 new stores and completing its IPO. The popularity of thrifting drove a 4.4% sales increase to $382.8 million, alongside a 5% EBITDA jump to $83.1 million. Heading into 2024, they forecast a 2-3% rise in comparable store sales and plan to open 22 new stores, achieving a full-year revenue between $1.57 billion to $1.59 billion. They expect flat to slightly down margins due to new store openings and wage investments, but anticipate overall stable adjusted EBITDA at $340 million. The company finished Q4 with $180 million cash on hand, observing a positive trend in Q1 with expected sales of approximately $350 million to $355 million and EBITDA around $60 million to $61 million.

Strong Finish in 2023 with Continued Growth Trajectory

The company concluded 2023 with robust performance, primarily driven by a 2.6% increase in comparable store sales complemented by new store openings. The growth stemmed from an uptick in transactions, though the average basket size remained fairly consistent. In the US, net sales grew by 3.9% to $199.5 million, with a 3.1% rise in comparable store sales attributed to higher transactions and marginally increased basket sizes. Meanwhile, in Canada, net sales saw a 4.6% increase to $155.4 million despite a slight foreign currency headwind, reaching a 2.0% comparable store sales gain fueled by transaction growth.

Improvements in Cost Efficiency and Profitability

A notable decrease in cost of merchandise sold was reported, down 70 basis points to 42%, thanks to reduced material and processing costs that more than offset increased labor expenses. The company processed more goods year over year, yielding higher sales, and maintained a significant portion of donations sourced on-site. Higher stock-based compensation, primarily from Initial Public Offering (IPO)-related expenses, led to a surge in salaries, wages, and benefits expenses, overshadowing a decrease in incentive compensation. Efforts to control Selling, General, and Administrative (SG&A) expenses were evident, although there was a marginal increase due to heightened credit card fees and IT costs. The quarter witnessed a GAAP net income of $43.9 million, inclusive of a substantial non-cash tax benefit, and an adjusted net income of $25.4 million, or $0.15 per diluted share.

Solid Balance Sheet and Forward-Looking Steps

Closing out the quarter, cash and cash equivalents stood at $180 million, with $175 million in cash generated from operations over the year. Total borrowing was recorded at $817 million, featuring a healthy leverage ratio of 2.0x against trailing twelve-month adjusted EBITDA. Post-quarter, the company amended its Senior Secured Credit agreement, reducing borrowing costs, and lowered debt by repaying portions of its Senior Secured Notes. It also anticipates cash generation from monetizing interest rate swaps and cross-currency hedges. Moving into 2024, the company charts a cautious yet optimistic course with predictions for a 2-3% rise in comparable store sales and the opening of 22 new stores. Full-year revenue is expected between $1.57 billion to $1.59 billion, foreseeing investments in wages and a high volume of store openings applying marginal pressure on gross margins. However, they anticipate compensatory efficiencies in fixed expense leverage, aiming for flat to slightly down adjusted EBITDA margins.

2024 Projections: Comps, Sales, and Store Expansion

The company foresees fiscal 2024 comparable store sales to grow from flat to 1%, with net sales approximating $350 million to $355 million, and adjusted EBITDA between $60 million to $61 million for the first quarter. Leaner year-over-year comps and adverse weather in January are factored into these estimates. Adjusted EBITDA for the year is projected at a flat $340 million. Notable are plans to reduce annual interest expense by approximately $10 million following a credit agreement amendment and debt repayment, offset slightly by additional interest from monetization activities. The guidance concludes with a GAAP net income effective tax rate assumption of 31%.

Earnings Call Transcript 2023-Q4

[Operator]

Good afternoon, and welcome to Savers Value Village's conference call to discuss financial results for the fourth quarter ending December 30, 2023. [Operator Instructions] 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 the SEC for a discussion on these 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 the most directly comparable GAAP financial measure [ could ] be found in today's earnings release and SEC filings.Joining from management on today's call are Mark Walsh, Chief Executive Officer; Jay Stasz, Chief Financial Officer; and Jubran Tanious, President and COO.Mr. Walsh, you may go ahead, sir.

[Mark Walsh, executive]

Thank you for joining us today and for your interest in Savers Value Village. We finished 2023 on a strong note and are pleased with the underlying performance and resiliency of our business.In the fourth quarter, constant currency net sales increased 4.5%, comparable store sales increased 2.6%, and we grew adjusted EBITDA to $83 million. We believe our results once again demonstrate the power of our vertically integrated model, which allows us to align our processing levels with demand levels to generate strong profitability and cash flow.As we have previously discussed, unseasonably warm temperatures created some softness in the demand for apparel in the first half of the fourth quarter. This reversed as the quarter progressed, with trends getting progressively better.The fourth quarter capped off a very important year for Savers and one in which we generated strong financial results while continuing to invest in people, processes, and technology to drive productivity and position us for accelerated growth.We are proud of our achievements in 2023, which included $1.5 billion in revenue and over $322 million in adjusted EBITDA, $175 million of cash from operations, the opening of 12 new stores, the growth of our customer loyalty program to over 5 million members, the completion of our self-checkout and in-store signage rollout, the opening of 3 centralized processing centers, including the first 2 in the United States, and of course, the completion of our initial public offering, all while diverting hundreds of millions of pounds of reusable goods away from North American landfills.Fueled by strong secular trends, the reuse economy and thrifting community are growing, and this is driving strong donation volumes and increasingly diverse customer base for Savers. We recently completed our latest thrift industry survey, and the results continue to demonstrate the growing popularity of thrift. In the past year, nearly 90% of consumers have engaged in the thrift cycle as a shopper, donor, or both. 1 in 4 consumers report they have or will increase their spend at thrift stores, citing a variety of reasons, including value, fun, and a unique sense of style. 6 in 10 Gen Z consumers say that more than a quarter of their wardrobe is secondhand. Ultimately, consumers are more focused on value, quality, and their unique style than they were a few years ago.With a 70-year operating history and a business that is 10x larger than our next largest for-profit thrift competitor, we are using our size and scale to further differentiate ourselves in a fragmented industry that has historically lacked innovation. Thrifters want a well-merchandised mix of value and selection in a brick-and-mortar setting. To that end, our stores are conveniently located, bright, well-organized, and easy to shop.We turn our inventory over 15x a year, with an average store putting out 35,000 new items on the floor every week. And we continue to drive supply through conveniently located and efficient donation locations. With the investments we have made over the last few years that demonstrated margin stability of our business and our strong unit economics, we are well positioned to accelerate our growth. Whether organically or through acquisition, our #1 growth initiative is to expand our store base. We will stay disciplined and grow our store footprint at the right pace in locations where we have done the analysis from both a donor and a shopper standpoint.In 2023, we began our multi-year plan to accelerate unit growth, and we opened 12 new stores. This year, we plan to open up 22 new stores. And in 2025 and beyond, we will plan to expand our unit growth even further to reach the high single-digit percentage range. The new store classes of 2022 and 2023 are performing well, in line with our expectations, and we are building a robust pipeline of future stores. With exceptional cash flow generation, we also continue to strengthen our balance sheet, as Jay will detail in a moment.In conclusion, Savers delivered strong fourth quarter and full year results, and we feel good about the underlying fundamentals of our business. While the macro environment remains a bit uncertain, and consumers continue to manage their discretionary spending, our average unit retail of around $5 offers an exceptional value proposition that positions us well.I want to thank our dedicated and hardworking team members who execute the business and serve our customers every day. Our mission is to grow the reuse economy and make secondhand second nature, thereby benefiting people, planet, and profit.With that, I will turn the call over to Jay to discuss our financial results. Jay?

[Jay Stasz, executive]

Thanks, Mark. We are very pleased with the underlying trends and our results in the fourth quarter and full year. As Mark mentioned and we previously reported, we saw some early impact from weather, but demand trends accelerated as the quarter progressed, and the month of December was very strong. We managed our processing levels accordingly and delivered better than expected sales and adjusted EBITDA.Let me take you through our fourth quarter results. Net sales increased 4.4% to $382.8 million. On a constant currency basis, net sales increased 4.5%. Our sales growth was driven by a comparable store sales increase of 2.6% and new store openings. Increased transactions drove the comp increase, and the average basket was down very slightly on a consolidated basis.In the United States, net sales increased 3.9% to $199.5 million. Comparable store sales increased 3.1%. The increase was driven by growth in transactions and to a lesser extent basket.In Canada, net sales increased 4.6% to $155.4 million. This included a $600,000 unfavorable impact from foreign currency. Comparable store sales increased 2.0%. The increase was driven by growth in transactions, partially offset by a modest decline in average [ baskets ].We opened 5 new stores in the fourth quarter, with 3 of these in the United States and 2 in Canada. For the full year, we opened 12 new stores in line with our plan. At year end, we had 326 stores, with 155 of these in the U.S., 159 in Canada, and 12 in Australia. Our new stores are ramping well and performing in line with our expectations and our underwriting model.Cost of merchandise sold as a percentage of net sales decreased 70 basis points to 42%. The 70 basis points decrease was driven primarily by lower material and other processing costs, which was partially offset by higher labor costs. We processed 250 million pounds of goods in the quarter and generated a sales yield of $1.54. This compares with 234 million pounds processed and a sales yield of $1.51 in the fourth quarter last year.On-site and GreenDrop donations represented 71.6% of pounds processed in the quarter versus 71.5% in the year-ago quarter. Salaries, wages, and benefits expense increased 21.9% to $90.1 million due entirely from stock-based compensation. Stock-based compensation was $21.6 million in the quarter. Of this amount, $20.8 million related to the IPO. Excluding the IPO-related stock-based compensation, salaries, wages, and benefits was $69.3 million and declined as a percentage of net sales by 210 basis points to 18.1%. The decline was driven by decreased incentive compensation and productivity improvements from the self-checkout kiosks that we installed primarily in '22 and '23, partially offset by an increase in our average wage rates.Our SG&A remains very well controlled. SG&A as a percentage of sales increased 30 basis points to 20.6%, driven primarily from increased credit card fees and IT costs. Depreciation and amortization increased 2.6% to $16.1 million, and interest expense decreased 6.9% to $17.6 million.GAAP net income for the quarter was $43.9 million and included a $31.3 million non-cash tax benefit related to the legal entity consolidation of Second Avenue. Adjusted net income for the fourth quarter was $25.4 million, or $0.15 per diluted share, compared to $26.9 million, or $0.18 per diluted share, respectively, in last year's fourth quarter. Adjusted EBITDA increased 5% to $83.1 million, and our adjusted EBITDA margin increased 10 basis points to 21.7%.Turning to the balance sheet, we ended the fourth quarter with $180 million of cash and cash equivalents. For the full year, we generated $175 million of cash from operating activities. At the end of the fourth quarter, our total borrowings outstanding were $817 million, and our net leverage based on a trailing 12-month adjusted EBITDA was 2.0x.Subsequent to the end of the fourth quarter, we've taken additional steps to further strengthen our balance sheet. First, in late January, we amended our Senior Secured Credit agreement. The amended agreement plus a corresponding upgrade of our debt rating by Moody's lowers our borrowing rate spread by 175 basis points.Second, in early March, we paid down $49.5 million of principal on our Senior Secured Notes. In addition, we are looking to monetize our interest rate swaps and cross-currency hedges in the coming weeks, which will generate approximately $35 million of cash proceeds, further enhancing our liquidity position.Lastly, let me conclude with some commentary around our initial outlook for 2024. We feel very good about the underlying fundamentals of the business. As Mark mentioned, there is some uncertainty in the overall environment, and consumers continue to manage their discretionary spending, so we think some level of cautiousness in our initial guidance is prudent.Our January sales were negatively impacted by severe winter weather in some of our key markets, but we've seen an acceleration in comp trends through February and early March and are encouraged by the trajectory of our business.Our initial fiscal year '24 outlook is for comparable store sales to increase in the range of 2% to 3%, in line with previous communications we are planning to open 22 new stores in '24. Our comp outlook combined with the number and timing of new store openings gets to a full year revenue outlook of $1.57 billion to $1.59 billion.The continued investment in wages and the higher number of new store openings is expected to put modest pressure on gross margin this year, but most of this is expected to be offset with better leverage over fixed expenses. As a result, we think both gross margin and total operating expenses as a percent of sales should be flat to slightly down, resulting in adjusted EBITDA margin also being flat to slightly down this year.The last component to highlight around the shaping of our initial '24 outlook is our vertically integrated model and ability to align processing and labor levels with short-term fluctuations in demand. As we have discussed, this is something that separates us from most other retailers and gives us confidence in achieving our bottom-line targets, despite the potential for modest variability in our top line. As a result, we are initially guiding to a full-year adjusted EBITDA number of $340 million rather than a range.A few additional comments to help with the building of models. The timing of our new store openings will be back-end weighted, with approximately 3 in the first half and 19 in the back half of the year. The first quarter represents our most challenging year-over-year same-store sales comparison, with a 7.2% comp last year that was driven by a 9% comp in Canada and a 5.6% comp in the U.S. The early portion of this year's first quarter was impacted by the holiday calendar shift and store closures and disruptions from the extreme weather in January.We estimate the weather disruptions in January and holiday calendar shifts will be an approximately 150 basis point headwind of first quarter comparable store sales growth. Similar to what we saw in the fourth quarter, we have seen increasingly positive trends as the quarter has progressed, and March is typically our largest volume month of the quarter.Given the strong comparable store sales growth in last year's first quarter, negative impacts from January weather and the holiday calendar shifts this year, we would expect first quarter comparable store sales of approximately 0% to 1%, net sales of approximately $350 million to $355 million, and adjusted EBITDA of approximately $60 million to $61 million.As a reminder, our year-over-year quarterly same-store sales comparisons get progressively easier as the year progresses. The amendment of our credit agreement in late January and the pay down of $49.5 million of debt in early March is expected to reduce our annual interest expense by approximately $10 million. This annual savings will be partially offset by increased interest expense associated with the expected monetization of our IR swaps. As a result, we are projecting interest expense of approximately $78 million for the year. Lastly, our GAAP net income guidance assumes an effective tax rate of 31%.That concludes our prepared remarks. We would now like to open the call for questions.

[Operator]

[Operator Instructions] Your first question is from Matthew Boss from JPMorgan.

[Matthew Boss, analyst]

So maybe a 2-part question for Mark. Maybe could you just elaborate on the cadence of sales trends that you've seen post-holiday, looking at January, February, and then March to date? Or is there just any way to parse out underlying trends that you're seeing in the U.S. and Canada? And then just if you could walk through second half drivers that support same store sales improvement beyond the first quarter.

[Mark Walsh, executive]

Matt, thanks for the question. As we look at the first quarter, it certainly wasn't eventful as Jay's recorded comments articulated we were up against a pretty a difficult 7.2% enterprise comp and a 9% comp in Canada. In January, our comps came under significant pressure from weather-related closures and disruptions. It was 140 increase in store impairment days, so over 1,200 store impairment days versus just 511 last year. Comps do get easier in March. We like the trends that we've seen since the significant impact of January. And I think we're being smartly conservative in terms of our guidance of flat to 1 for the quarter as we see that 2-year stack in line with the fourth quarter for both the U.S. and Canada. Given the early quarter challenges, we also feel really good about the comp guidance while leveraging our vertically integrated model to guide to that $60 million to $61 million EBITDA target for the first quarter.With respect to your second question on what's going to drive second half trends, I think we just see a normalization of the patterns that we saw in the late fourth quarter and what we're seeing into early March. And We've got the same cadence in terms of marketing, as well as strengthening our fundamentals of both supply and demand. And ultimately, look, the comps do get easier as we go through the year.

[Matthew Boss, analyst]

Great. And then maybe, Jay, for a follow-up on the bottom line. As we break down the adjusted EBITDA margin guide for the year, how best to think about puts and takes on the gross margin line? And just your comfort with inventories coming out of the year, just your comfort with inventory on hand.

[Jay Stasz, executive]

Yes. Sure, Matt. From an inventory standpoint, I'll take that one first. I mean, that is good news because it is an indication of our great supply. So certainly, the inventory year-over-year has increased. But again, we've seen nice trends in our onsite donations, which is a big driver of that. And then in terms of margin for '24, thinking about that, right, obviously we have a little bit of pressure that could impact our gross margin year-over-year as we ramp the new stores. When I break it down, we expect the gross margin to be flat to slightly down year-over-year. We will have slight increases in our used material costs, but we can mitigate some of that with increasing [ OSD ] penetration. And on the production labor side, again, we're investing in the staff. So we will have increases there, but we're able to offset that with some processing efficiencies that we would expect from the labor. So we mitigate some of that, and that ultimately then leads to a flat gross margin or slightly down.

[Operator]

Your next question is from Randy Konik from Jefferies.

[Randal Konik, analyst]

Maybe I just want to start on the real estate opening timing just to give us some color on what's driving more of the back half waiting. And then can you give us any perspective on how you're thinking about leases for '25? Are you starting to kind of look for real estate there? I'm just trying to get a sense of the pipeline.

[Jubran Tanious, executive]

Yes, randy. It's Jubran. Yes, absolutely. So 2024, as Mark and Jay talked about, we've committed to 22 we feel very, very good about that. You're absolutely right. It is back end loaded. And a lot of that is because it's a function of building up the new store opening muscle that we have been working hard at really over the last year. And every aspect that goes into opening new stores, we have built up in terms of people, process, technology, the number of deal makers that we have, the technology platforms that we have, the marketing ourselves to brokers and landlords and developers. And I think I've stated on previous calls a very positive response that we're getting from national landlords. So what you're seeing in 2024, is the outcome of building up that muscle. Once we get into the back half of Q2, now we're in a steady state position where we start to see stores that are opening in a more balanced way across all 4 quarters as we get into 2025.And so to your question about how are the early stages of 2025 shaping up, very positive. In fact, I will tell you we are already sitting on a handful of signed leases with more to come for Q1 of 2025, Q2 of 2025, and there'll be many more to come after that. So feel great obviously about the 22 this year. We feel great about the 25 next year. In fact, we tell you, we're ahead of the curve on that. But I go back to what Mark said, we're not limiting ourselves. If we can go faster we will, but we put a premium on execution and [ replicatability ]. And when we look at the performance of the new stores that we have had over the last 1 to 2 years, all of them performing in line with expectations across different markets. And that just gives us tremendous confidence that our formula is working.

[Randal Konik, analyst]

Great. Helpful. And then, I guess one last question more for probably Jay. When you think about the complexion of comp guidance, annual comp guidance for this year, is it just basically assuming all from just traffic versus a mixture of mostly traffic and some ticket? Just want to understand your thoughts there. And then, as we think about this kind of model as a model that you would want to model over a multi-year timeframe, do you think that this type of comp guidance is the comp guidance that would be more appropriate for kind of an investor thinking out 3 years in the business, or is 3 years to 4 years more likely, in your opinion, and this year's more subdued because of comparisons? Just want to get some perspective there as well.

[Jay Stasz, executive]

Yes, sure, Randy. Thanks for the question. In terms of the composition of the comp on the annual basis, it's a little bit of a tale between the 2 countries, and it reflects what we've seen trends. So in the U.S., I would say that comp would be, 2/3 transactions and then probably 1/3, a bit of a lift on average basket. And in Canada, it would be primarily driven by transactions with essentially a flat average basket. We do expect that we'll have some modest price increases over the next year. And Canada, what we see is that that is, pretty much offset with the decrease in UPT. In the U.S. though, we are seeing some upsides in that and that the average basket is climbing. So that's kind of how we modeled that for '24.And then in terms of your question on this year's guide and long-term, I mean, we've talked about being appropriately conservative with our comp guidance. We think that's the right position to take, especially now in this current environment, right, where there is some economic uncertainty. So if we think about the top end of that range at [ 3 ], really a couple things. I mean, again, we think that's appropriately conservative. We think also that sets up the expense structure underlying that comp guide so that if the demand does pick up, we're in a great position to capitalize that and get some leverage on our expenses. When I think about longer-term guidance, I think maintaining this level is appropriate. A [ 2 to 3 ] range would make sense going forward. And talking about our long-term algorithm, right, if we think about long-term, really that long-term algorithm is combined of our expectation of comp and then our unit growth.And as Jubran has talked about, we are starting to ramp our new store growth appropriately. We've got 22 this year. We're planning to do, say, 25 next year and then 25 plus in the years beyond that. So we feel very good with that.And with a 2 to 3 comp and that type of unit growth, we definitely build right into our long-term algo. So we feel very comfortable with that.

[Operator]

Your next question is from Brooke Roach from Goldman Sachs.

[Brooke Roach, analyst]

My question is for Mark. I was hoping you could discuss the traffic driving initiatives that you have in 2024, including marketing and other customer facing initiatives such as loyalty. What are you seeing in terms of new customer acquisition today and what are you expecting for the year?

[Mark Walsh, executive]

Brooke, thanks for the question. From a loyalty perspective, I couldn't be more proud of the team and how we're executing new member signups. 2023 was a really great year in terms of our growth of our loyalty platform growing over 10% in North America, which really, really strikes to the heart of the team members in the stores converting nonmembers into members. And it's more of the same there. I mean, we are staying focused on that initiative. Jubran, Michael Tudino and Nicole McPherson, when they're talking to their store leadership, that is a big priority for us as we think about facing off to the consumers that are coming into our environment. So more of the same in 2024 when it comes to the loyalty member and the growth of that particular metric.In terms of connecting with our member base, the influencer programs that we put in place are working. We've got great interaction with our customer base. And I'm sure you recall we've done a lot of surveying to understand what motivates the thrifter to come into the environment and what keeps them coming into Savers. And it's about authenticity. We're very authentic in terms of how we talk to our thrifters. And I think that connection keeps our attrition rates at very, very low levels. So when we look at our top cohorts, we have best-in-class attrition rates being in the low single digits. So we're very pleased with both the member signups and our continued interaction with our loyalty members. And we believe that that is the status quo for 2024, continuing to move on the positive momentum we've already created in 2023.

[Brooke Roach, analyst]

And maybe one for Jay. In response to Randy's question, you mentioned that if demand does pick up, you could get some leverage on your expenses this year. Can you elaborate on what the expense leverage point is for this year? And what an additional point of comp might mean for the bottom line? Does that leverage point change as you move through 2024 and into 2025 as you get the first few tranches of new stores through the system, and you no longer see the same level of gross margin pressure from some of those new store openings?

[Jay Stasz, executive]

Yes, Brooke, the way we think about our leverage point is comps that exceed inflation levels is where we start to gain some leverage. I mean, obviously, setting up our guidance and our expense structure the way we have, if we see increases in demand, we will get some flow through on that. So yes, and I don't think, as we grow, we're going to continue to ramp stores. So as we've talked about overall from an EBITDA margin standpoint, I mean, we're going to -- we're modeling, basically consistent EBITDA margin this year to last year, maybe slightly down say 10 basis points or 20 basis points. And going forward, we would expect to work to maintain that EBITDA margin. We will as we gain scale and as we get the pipeline, as we get past this ramp and new stores start to come in to the store base, right, we get 25 and consistently year after year. We will gain leverage, we think, on the operating expenses so that in time, once we get past this first initial ramp, we would expect some leverage on EBITDA margin so that we'll grow at, say, 10 basis to 20 basis points in the future years.

[Operator]

Your next question is from Michael Lasser from UBS.

[Michael Lasser, analyst]

So between this first quarter and the last quarter, the business is becoming a bit more volatile. Would you attribute that to any change in the competitive landscape or just any fatigue surrounding the trend towards thrifting that's coming off of the pandemic?

[Mark Walsh, executive]

Yes, Michael. I would not describe the business as volatile with respect to the factors that you represented. I mean, we're talking about a weather impact of 1,200 store days, that's -- store closures are just part of the business of running a retail business. When we think about fatigue with respect to thrift and thrifting, our recent survey data actually demonstrates the opposite. That 90% of consumers are engaged in thrift as either a shopper or a donor or both. 1 in 4 consumers are going to increase their spending in thrift. And that 6 in 10 Gen Z customers have secondhand goods in their closet. We see the trend continuing to accelerate. And on the donation side, I will tell you that our onsite donation volume continues to increase in both the U.S. and Canada, which again goes back to that circular economy and the power of this momentum around doing the right thing with a used textiles. So quite the opposite in terms of, I think the perspective about the secular trend, we actually see it continuing to be very strong. And we'll point to -- especially in January, we'll point to a very volatile weather situation that conspired to just force us to close stores or limit hours in stores in a manner that was significant relative to last year in January.

[Michael Lasser, analyst]

Got you. That's helpful. My follow-up question is, what have you assumed for the sales yield that's embedded within the guidance for this year, especially with inventory up so significantly year-over-year? And are there any indications that you're running up against more pricing constraints with, at least in the mind of the consumer.

[Jubran Tanious, executive]

Yes, Michael. So with regard to sales yield, we've enjoyed some pretty robust increases in sales yield over the last several years. We've assumed something a bit more modest for remainder of year, on the order of a 3% to 4% increase in sales yield, which in our mind is very achievable for all of the factors that we've talked about in the past. And a reminder for the group, sales yield is sales divided by pounds processed. So when we look at matching supply on our sales floor with demand, you start with that denominator. You start with processing the right amount of goods. And as Mark mentioned, we're in a very robust supply situation. So we're in a great spot.When it comes to the sales portion of it, it's all of those things that we talk about. The quality, quality of goods, particularly associated with robust on-site donation growth. Space to sales. So certainly, germane as we think about what the spring transition is going to look like over the next couple months. As all of you know, we don't do a spring flip in our stores. We match what the thrifter is buying in terms of long sleeve, short sleeve, as it's happening, with space to sales dashboards that our operators manage the business to. Comparative pricing, back stock, I mean, all the things that go into sales yield tell us that our assumption of a 3% to 4% percent for remainder of year is very achievable.

[Operator]

Your next question is from Peter Keith from Piper Sandler.

[Peter Keith, analyst]

You guys had touched on the central processing centers, you've got 3 open now. Maybe you could talk about how those are trending. Is it looking increasingly like something that could be scaled up to more and more units? And if you could touch also on how the book processing centers are performing.

[Jubran Tanious, executive]

Yes, Peter. I'll answer a portion of it, and the guys can jump in if there's anything additionally. So yes, we are currently operating 3 CPCs in Canada, 2 in the U.S., with a third U.S. location to open in Southern California, either the end of this year or early next year. And a reminder, these are long-term strategic assets for us that help us unlock growth and overall market performance. And I would tell you, that it's all about continuous improvement. And we are thrilled month-by-month with the improvements in efficiency and capacity and throughput that we are seeing in these. So very enthusiastic about CPC. And in fact, we'll take it a step further. There's a bit of a innovation cascade that has happened here where many of the learnings from CPC we are able to harness in a bit more nimble, a less capital intensive almost CPC light version that allows us to do exactly what we talked about before, open up new store locations that traditionally would not have been possible except for the presence of off-site production. So we have a few of these that are operating currently in Canada. We are prospecting to open more. We've got a pro forma algorithm that is very attractive. And again, I would think about it in terms of a CPC light where it's a bit more nimble, less capital intensive and still allows us to unlock that new store growth that we talk about.

[Mark Walsh, executive]

Well said, Jubran. I think on automated book processing, we continue to see the merits of that program continuing. We've got 93 stores that are being served by the automated book processing units that we have in place, both in central processing centers and in the back of some stores. Presents us exceptionally well from a consumer-facing standpoint, sharply priced and very well-merchandised books. And look, books is a gateway category for thrifters. So this initiative has proven to be quite successful and a great return on investment for us from a capital perspective.

[Peter Keith, analyst]

Okay, very interesting. I want to pivot to inventory, and I think it was asked earlier, but I am intrigued with the 50% growth in inventory year-on-year. It's a pretty big step up from prior quarters. So on one hand, maybe this suggests some very healthy sales that could come down the pipe. On the other hand, could suggest some gross margin pressure. Maybe just help us think about the balance between those 2, and maybe also is OSD and GreenDrop going to just drive this level of inventory growth in the quarters to come?

[Jay Stasz, executive]

Yes. And really, that inventory increase is a function of the great supply that we've been seeing. We have a process where we take an inventory, and if it's not the right season, we backstock it and hold it. So that's really the driver there from, again, the basis of our inventory is so low that we do not have an aged or obsolete inventory risk or a gross margin risk from that standpoint. So we feel very good about it.

[Operator]

Your next question is from Anthony Chukumba from Loop Capital Markets.

[Anthony Chukumba, analyst]

And nice job beating on the top line, given the little bit of lightness on the top. Or beating on the EBITDA, given a little bit of lightness on the top line. So I guess my first question, so you talked about the 2% comp guidance and sort of setting your expenses to assuming that. I guess my question is, let's say you do 4%, like, how much would that incremental 100 basis points of comp mean in terms of EBITDA?

[Jay Stasz, executive]

Yes, so we would -- we estimate we would flow that through about 30%.

[Anthony Chukumba, analyst]

Got it. Okay, so call it like a 30% incremental EBITDA margin. Is that the right way to look at it or think about it?

[Jay Stasz, executive]

Yes, I think that's fair.

[Operator]

Your next question is from Mark Petrie from CIBC.

[Mark Petrie, analyst]

I have 2 questions. Could you just give us a sense of the geographic breakdown of the 22 new stores? And are any of those in the boutique format that you've used selectively in Canada?

[Jubran Tanious, executive]

Yes. The geography of the 22 stores, it is across all 3 countries, we do have a couple that are in the boutique format, but the vast majority are traditional stores. And then across the geographies themselves it's pretty distributed, so we are not single threaded in any 1 or 2 markets in Canada or the U.S. As we've talked about in the past we are fishing in every major market and looking for great opportunities. So you see a pretty good spread across all 3 countries.

[Jay Stasz, executive]

Okay. And the boutique [indiscernible]...

[Mark Petrie, analyst]

They're all in Canada at this point? Sorry, go ahead.

[Jay Stasz, executive]

I'm sorry, I just wanted to chime in. I mean, basically, right, Jubran, we have a handful of Australia opportunities that we're looking at that may come, but the majority of what we have in the 22 stores is basically 50-50 split between U.S. and Canada.

[Mark Petrie, analyst]

Okay. And just to clarify, all of the boutiques, those remain in Canada? Or are you going to test that in the U.S.?

[Jubran Tanious, executive]

No, that is not in the U.S. Those are in Canada.

[Mark Petrie, analyst]

Yes. Okay, perfect. And then just on the GreenDrops, how many of those do you have in the market today? And what's the plan for 2024?

[Jubran Tanious, executive]

Yes, GreenDrop is again, we are actively pursuing multiple markets at the same time. As we talked about earlier, Mark, you can't start any supply conversation without talking about on-site donations. And so from a supply perspective, we are in a very robust position right now, not just for this year, but beyond. And we should expect that to continue. We've talked about this, right? I mean, when we provide the donor with a reliably fast, friendly experience, we can expect to be the donation destination of choice, whether that be the on-site donation or the GreenDrop. GreenDrop is our long-term play to take that same fast, friendly experience and meet the donor where they're at, part of a daily use, and help us elevate supply quality for years into the future. So we like the performance of the GreenDrops we've opened. We will continue to open up GreenDrops this year, actually making an entrance into Canada as well. And again, we think that it's [ replicatable ]. Now, as we've talked about on previous calls, municipalities, landlords love GreenDrops. They love the use. It's fast, friendly, clean. It presents well. There are some obstacles when it comes to what the code and the use envisions. There are many municipalities where that sort of very attractive staffed donation point is not even envisioned in the code. So that varies by municipality. And the way that we mitigate against that is that we're fishing in multiple markets at the same time. And that's what allows us to continue to grow that into the future. So as we sit today, we are just shy of 70 GreenDrop locations, and we'll continue to add to that this year and beyond.

[Mark Petrie, analyst]

Okay. And then just back to the new store pipeline, I recall that one of the sort of business case arguments for the CPCs was a simplification of the shipping into different locations and effectively it sort of broadens the potential scope of the locations you could open fewer receiving doors, I guess, specifically. So are any of the locations that you've agreed to for 2024 in that sort of spec? Or is it still the typical location that you've signed up for?

[Jubran Tanious, executive]

Yes, great question, Mark. No, your intuition is right. Several of the locations that we're looking at for 2024, and by the way, some that we opened in 2023, are making use of that increased degrees of freedom, if you will. We are able to look at more boxes because of the freedom that that gives us, exactly to your point. And that will be the case in 2025 and beyond as well. It really serves as an unlock for us and just kind of widens the top of that funnel of possibility of new stores for us.

[Mark Walsh, executive]

Yes, Mark. It's really accelerating our strategy of new store growth, and it's giving us the opportunity to look at more locations. We're seeing that play out, and it's been a big win for us.

[Operator]

Your next question is from Bob Drbul from Guggenheim.

[Robert Drbul, analyst]

I was wondering if you could talk a little bit about sort of the wage pressure, wage trends that you're seeing in the stores and I guess, labor availability [ in ] managers as you think about, I think, the 22 stores that you're opening?

[Jubran Tanious, executive]

Yes. Fair question. We watch this pretty carefully. And just like everything else, we've got all the necessary metrics that give us a good snapshot as to what's happening in every market that we operate. At an enterprise level, I would tell you that the labor market has really improved over the last 6 months to 12 months or so in the markets that we operate in. We've been pretty aggressive in terms of keeping up with competitive wage rates. From an overall wage rate perspective, we've grown 5% to 6% year-on-year. And we're seeing things settle down. At a country level, we've seen significant year-over-year improvement in turnover rate. Vacancy remains in the low to mid single digits across all 3 countries. So all in all, we feel very good about staffing levels in our stores as we think about new store locations. Again, all of these new store locations are operating in infill markets, where we are able to leverage management pipeline, team member pipeline. I think the people services team, along with our field operators, do a very good job of getting out ahead of that curve in terms of cross training, hiring fairs that happen well in advance of the grand opening of a new store. So you put all that together, Bob, and I'd say we feel very good about labor in both our comp stores as well as the new stores to come.

[Robert Drbul, analyst]

Great. And any commentary around the Second Avenue stores, and if you guys are -- how the M&A pipeline availability is, or if you're looking at anything there?

[Mark Walsh, executive]

So from a Second Avenue perspective, the team's done a great job of moving that initiative forward. We continue to see business contributions, increase at a pace that we're very, very pleased with so that was the fundamental part of that strategy as we as we continue to move that 2-way business forward. In terms of M&A, no news to report on this part of our strategy. It remains geographic infill with a strong supply base solid brand locally, a stable workforce, but we're going to -- we're very judicious in our approach. And obviously when the opportunity creates and fulfills itself, we'll be reporting it to the street.

[Operator]

[Operator Instructions] Your next question is from Mark Altschwager from Baird.

[Mark Altschwager, analyst]

I wanted to touch a bit more on supply. I was hoping you could give us a little bit more color on the flow that you're seeing across the delivered versus onsite donations versus the GreenDrop. And what you're seeing from a quality of supply standpoint with those various vectors?

[Jubran Tanious, executive]

Yes. From a quality perspective, I would tell you we've not been able to detect any meaningful changes in the average quality of supply that we see from each of the channels. What we've talked about in the past, we do know that the on-site donation by and large brings a higher quality supply than typical delivered. We do know that. In terms of how we modulate the amount of supply, on-site donation is the always-on superior source of supply. We're always saying yes to the donor. And as we mentioned, we're seeing very robust performance and growth and on-site donation in all 3 countries frankly. The flex lever in that is the delivered supply, that's the one that we are able to manipulate over long periods of time, where if we're seeing very outsized on-site donation growth, we're able to flex for that by modulating delivered. So from an overall quality standpoint, not seeing anything meaningful that we can detect, no changes. But from modulating the amount of supply that we acquire, that's really how we do it. And hopefully that's helpful.

[Mark Altschwager, analyst]

That is helpful. And then just as a follow-up, I think it was mentioned in the prepared remarks, you're expecting slightly higher product costs this year. Is that a function of the mix? Or is that a function of rates that you're paying your nonprofit partners? Just what's driving that expectation for the higher cost of materials?

[Jay Stasz, executive]

Yes, that's just typical. And it is driven by the contractual rates with our not-for-profit partners. And it's a typical renewal process that we go through. It's not very significant, but it is a little bit of a [ factor ]. And like I said on this call, we're able to offset part of that rate increase with increasing our OSD mix.

[Operator]

There are no further questions at this time. I will now hand the call back to Mark Walsh for the closing remarks.

[Mark Walsh, executive]

Thank you. I'd like to thank everyone again for their time and interest in Savers Value Village, and we look forward to speaking to you again when we report our first quarter results. Thanks again.

[Operator]

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may all disconnect.