Savers Value Village(SVV) - 2023 Q4 - Annual Report

Part I Item 1. Business Savers Value Village, Inc. is the largest for-profit thrift operator in the United States and Canada, with 326 stores, operating a vertically integrated model from sourcing to retail sales, with a strategic focus on cost-effective On-Site Donations and growth through store expansion and operational efficiency, all rooted in ESG principles - The company operates 326 stores under banners including Savers, Value Village, and 2nd Ave., making it the largest for-profit thrift operator in the U.S. and Canada[24] - The business model is vertically integrated across three core operations: Supply & Processing, Retail, and Wholesale[31][36] - A strong loyalty program with over 5.3 million active members drove 70.3% of point-of-sale transaction value in fiscal year 2023[24] - On-Site Donations (OSDs) are a critical and growing supply source, accounting for 65.2% of total pounds processed in fiscal 2023. OSDs have a cost per pound that is, on average, less than one-third that of delivered supply[34][95][103] - The company's growth strategy focuses on strategically expanding its store base, with a target of approximately 2,200 potential new locations identified across the U.S. and Canada. The company plans to open approximately 22 new stores in 2024 and 25 or more annually from 2025 through 2027[83][150] - The company is implementing technological innovations to drive efficiency, including Centralized Processing Centers (CPCs) and Automated Book Processing (ABP) systems, for which it holds exclusive rights for a period[80][122][167] - As of December 30, 2023, the company employed over 22,000 team members. In fiscal year 2023, 72% of open salaried management positions in the U.S. and Canada were filled by internal promotions[173][174] Item 1A. Risk Factors The company faces significant risks primarily related to its business model, operations, and financial structure, including dependency on sourcing, labor costs, intense competition, operational disruptions, material weaknesses in internal controls, substantial indebtedness, and governance implications as a "controlled company" - The business model's success is highly dependent on the ability to source a sufficient quantity of quality secondhand items at attractive prices, primarily from non-profit partners and on-site donations[184][200] - The company has identified material weaknesses in its internal control over financial reporting related to insufficient technical accounting expertise, lack of clearly defined roles in finance, and ineffective IT general controls (ITGCs)[191][269] - The company is vulnerable to cybersecurity threats and data breaches, having experienced a ransomware attack in July 2020 that caused data loss and operational disruptions[188][256] - Significant indebtedness ($816.8 million as of Dec 30, 2023) poses risks, including the need for substantial cash flow for debt service and limitations on operations due to restrictive covenants[194][297] - The company is a "controlled company" as the Ares Funds beneficially owned 83.9% of common stock as of Dec 30, 2023. This exempts it from certain NYSE corporate governance requirements, and Ares Funds' interests may conflict with other stockholders'[196][321][326] - The company's growth and performance are dependent on attracting and retaining store and processing center team members, and it may be negatively affected by labor market conditions and employee relations[185][211] Item 1B. Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[348] Item 1C. Cybersecurity Risk Management, Strategy and Governance The company's cybersecurity strategy is aligned with industry frameworks such as NIST and CIS Controls and includes annual risk assessments, continuous monitoring, vulnerability scanning, and external penetration testing, with governance overseen by the Board and Audit Committee, and a comprehensive review and enhanced controls implemented following a 2020 ransomware incident - The cybersecurity risk management strategy is aligned with the National Institute of Standards and Technology (NIST) framework, the Center for Internet Security (CIS) Controls 8.0, and the Payment Card Industry Data Security Standard (PCI DSS)[350] - Oversight is provided by the Board and the Audit Committee, with the Chief Information Officer (CIO) having primary responsibility for assessing and managing cybersecurity risks[358][361] - The company experienced a ransomware incident in 2020. In response, it implemented enhanced controls, including improved backup approaches, proactive security monitoring, and expansion of the cybersecurity team[356] Item 2. Properties As of December 30, 2023, the company operates 326 retail stores, all occupied under operating leases, located across the United States, Canada, and Australia, in addition to leased corporate offices, distribution centers, and centralized processing centers Number of Stores by Location | Location | Number of Stores | | :--- | :--- | | United States | 155 | | Canada | 159 | | Australia | 12 | | Total | 326 | - All of the company's 326 stores and other facilities, including corporate offices and distribution centers, are occupied under operating leases[362] Item 3. Legal Proceedings Information regarding the company's legal proceedings is referenced in Note 15 of the consolidated financial statements - For details on legal proceedings, refer to Note 15. Commitments and Contingencies in the consolidated financial statements[365] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[366] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock began trading on the New York Stock Exchange under the ticker symbol "SVV" on June 29, 2023, and it does not anticipate paying cash dividends in the foreseeable future, having authorized a $50.0 million share repurchase program in November 2023 under which no shares were repurchased in fiscal year 2023 - The company's common stock began trading on the NYSE under the symbol "SVV" on June 29, 2023[369] - The company does not anticipate paying any cash dividends for the foreseeable future. The last dividend of $262.2 million was paid on February 6, 2023[370][371] - A share repurchase program of up to $50.0 million was authorized in November 2023, set to expire in November 2025. No shares were repurchased under this program in fiscal year 2023[372] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal year 2023, net sales increased by 4.4% to $1.5 billion, driven by a 4.7% growth in comparable store sales, though net income declined to $53.1 million primarily due to a 33.8% increase in salaries, wages, and benefits, including $69.1 million in IPO-related stock-based compensation, and a 36.7% rise in net interest expense, with the company completing its IPO in July 2023 to repay debt and improving sales yield to $1.48, while maintaining liquidity through operations and its revolving credit facility, and outlining critical accounting policies Consolidated Financial Highlights (in thousands) | (in thousands) | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $1,500,249 | $1,437,229 | 4.4% | | Operating income | $141,857 | $206,226 | (31.2)% | | Net income | $53,115 | $84,720 | (37.3)% | - The 4.4% increase in net sales was driven by a 4.7% growth in comparable store sales and a 3.8% increase in the number of stores, partially offset by unfavorable foreign currency impacts[425] - Salaries, wages, and benefits expense increased by 33.8% to $366.2 million, largely due to $69.1 million in stock-based compensation expense recognized in connection with the IPO and a $24.1 million special one-time bonus related to the Notes offering[431][433] - Net interest expense increased by 36.7% to $88.5 million, driven by higher interest rates and the issuance of $550.0 million in Senior Secured Notes in February 2023[437][438] Key Performance Indicators | Key Performance Indicator | 2023 | 2022 | | :--- | :--- | :--- | | Comparable Store Sales Growth (Total) | 4.7% | 13.5% | | Number of Stores (Total) | 326 | 314 | | Pounds Processed (millions) | 984 | 985 | | Sales Yield | $1.48 | $1.39 | - The company completed its IPO on July 3, 2023, receiving net proceeds of $295.0 million, which were used along with cash on hand to repay $252.4 million of its Term Loan Facility and redeem $55.0 million of its Senior Secured Notes[391] - Free Cash Flow (a non-GAAP measure) increased to $83.4 million in fiscal 2023 from $59.3 million in fiscal 2022[509] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are interest rate risk on its variable-rate debt and foreign currency exchange risk from its operations in Canada and Australia, with $321.8 million in variable-rate debt as of December 30, 2023, 85.5% of which is hedged through interest rate swaps, and approximately 45.5% of fiscal 2023 net sales denominated in foreign currencies, mitigated by currency forwards and cross-currency swaps - The company is exposed to interest rate risk on its $321.8 million of variable-rate debt. A hypothetical 1.00% increase in Term SOFR would increase annual interest expense by $3.2 million[566][568] - To mitigate interest rate risk, the company has entered into interest rate swaps that effectively hedge 85.5% of its variable-rate debt exposure as of December 30, 2023[569] - The company is exposed to foreign currency risk, with 45.5% of fiscal year 2023 net sales denominated in currencies other than the U.S. dollar. It uses currency forwards and cross-currency swaps to manage this risk[570] Item 8. Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for the fiscal years ended December 30, 2023, December 31, 2022, and January 1, 2022, as audited by KPMG LLP, including the Consolidated Balance Sheets, Statements of Operations and Comprehensive Income, Statements of Stockholders' Equity, and Statements of Cash Flows, along with detailed notes, reporting net sales of $1.5 billion, net income of $53.1 million, and diluted earnings per share of $0.34 for fiscal year 2023 Key Financial Data for Fiscal Year 2023 (Consolidated) | Metric | Amount (in thousands) | | :--- | :--- | | Statement of Operations: | | | Net Sales | $1,500,249 | | Operating Income | $141,857 | | Net Income | $53,115 | | Diluted EPS | $0.34 | | Balance Sheet (End of Period): | | | Total Assets | $1,867,405 | | Total Liabilities | $1,491,350 | | Total Stockholders' Equity | $376,055 | | Cash Flow Statement: | | | Net Cash from Operating Activities | $175,165 | | Net Cash used in Investing Activities | $(92,365) | | Net Cash used in Financing Activities | $(17,044) | - The company adopted the new lease accounting standard (Topic 842) as of January 2, 2022, which resulted in the recognition of right-of-use lease assets of $499.4 million and lease liabilities of $498.7 million on the balance sheet as of December 30, 2023[577][588][649] - As of December 30, 2023, the company had total debt with a face value of $816.8 million, consisting of $495.0 million in Senior Secured Notes and $321.8 million under its Term Loan Facility[667] - Stock-based compensation expense was $72.6 million in fiscal 2023, a significant increase from $1.9 million in 2022, primarily due to the vesting of performance-based options upon the company's IPO[712] Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[747] Item 9A. Controls and Procedures Management concluded that the company's disclosure controls and procedures were not effective as of December 30, 2023, due to identified material weaknesses in internal control over financial reporting related to insufficient technical accounting and SEC reporting expertise, lack of clearly defined roles within finance, and ineffective information technology general controls, with remediation efforts underway - Management concluded that disclosure controls and procedures were not effective as of December 30, 2023[749] - The ineffectiveness was due to three identified material weaknesses: insufficient technical accounting/SEC expertise, lack of clearly defined roles in finance, and ineffective IT general controls (ITGCs)[751] - Remediation efforts are underway, including the hiring of a director of internal audit and a director of SEC reporting, and the engagement of external advisors[752] Item 9B. Other Information During the fourth quarter of 2023, several executive officers, including the CEO, Chief People Services Officer, and General Counsel, adopted or amended pre-arranged stock trading plans pursuant to Rule 10b5-1(c) for the potential sale of company stock - CEO Mark Walsh entered into a Rule 10b5-1 plan on November 17, 2023, for the potential sale of up to 612,000 shares[756] - Other executive officers, including Mindy Geisser and Richard Medway, amended their existing Rule 10b5-1 plans in November 2023[757][758] Part III Item 10. Directors, Executive Officers and Corporate Governance This section provides biographical information for the company's directors and executive officers, detailing the board's staggered composition and leadership structure, noting its utilization of exemptions from certain NYSE corporate governance requirements as a "controlled company" due to majority ownership by Ares Funds, and outlining the roles and composition of its three standing committees: Audit, Compensation, and Nominating, Governance & Sustainability - The report lists the names, ages, and positions of all non-employee directors and executive officers, along with their professional backgrounds[761][762][771] - The company is a "controlled company" under NYSE rules and is exempt from requirements to have a majority-independent board, a fully independent compensation committee, and a fully independent nominating committee[783] - The Board of Directors is divided into three classes, with directors serving staggered three-year terms[782][787] - The Board has three standing committees: Audit, Compensation, and Nominating, Governance & Sustainability, with their respective compositions and responsibilities outlined[790] Item 11. Executive Compensation This section details the compensation for the company's Named Executive Officers for fiscal year 2023, consisting of base salary, an Annual Incentive Plan based on Adjusted EBITDA which achieved a 103% payout, and long-term equity incentives, with the company also discussing its use of a peer group for benchmarking and the role of its independent compensation consultant, and the post-IPO granting of Restricted Stock Units in addition to stock options - The 2023 Annual Incentive Plan (AIP) for NEOs was based on a single metric: Adjusted EBITDA. The company achieved 101% of its goal, leading to a payout of approximately 103% of target bonuses[824][827][828] Fiscal Year 2023 AIP Payouts | Name | Target (% of Base Salary) | Actual Amount Earned | | :--- | :--- | :--- | | Mark Walsh | 100% | $993,002 | | Jay Stasz | 75% | $378,216 | | Jubran Tanious | 75% | $401,507 | | Richard Medway | 75% | $399,278 | | Mindy Geisser | 75% | $372,376 | - In connection with the IPO, 25% of the performance-based stock options granted to NEOs prior to 2022 became vested[834] - Following the IPO, the company began granting Restricted Stock Units (RSUs) to some employees, including the CFO[815][836] - The Compensation Committee engaged FW Cook as its independent compensation consultant for fiscal year 2023[844] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details the beneficial ownership of the company's common stock as of February 15, 2024. Funds managed by the Private Equity Group of Ares Management Corporation are the principal stockholder, beneficially owning 83.45% of the outstanding common stock. The company's directors and executive officers as a group beneficially owned 2.44% of the common stock. The section also provides information on equity compensation plans - As of February 15, 2024, funds managed by the Private Equity Group of Ares Management Corporation beneficially owned 134,659,188 shares, representing 83.45% of the outstanding common stock[903] - As of February 15, 2024, all directors and executive officers as a group beneficially owned 4,044,891 shares, representing 2.44% of the outstanding common stock[902] Item 13. Certain Relationships and Related Transactions, and Director Independence In connection with its IPO, the company entered into a Stockholders Agreement and a Registration Rights Agreement with its majority stockholder, the Ares Funds. The Stockholders Agreement grants the Ares Funds significant governance rights, including the right to designate a majority of the board of directors as long as they own 40% or more of the common stock, and consent rights over major corporate actions. The Registration Rights Agreement provides the Ares Funds with demand and piggyback registration rights. The board has determined that eight of its directors are independent under NYSE rules - The company entered into a Stockholders Agreement with the Ares Funds, granting them the right to designate a majority of the board of directors while their ownership is 40% or more[904] - The Stockholders Agreement also requires the Ares Funds' prior written consent for major corporate actions (e.g., mergers, large acquisitions, significant debt incurrence) as long as their ownership is at least 30%[906] - A Registration Rights Agreement provides the Ares Funds with unlimited "demand" and customary "piggyback" registration rights for their shares[907] - The board of directors has determined that eight directors are independent in accordance with NYSE rules: Aaron Rosen, Robyn Collver, William Allen, Duane C. Woods, Aina Konold, Kristy Pipes, Susan O'Farrell, and Jordan Smith[914] Item 14. Principal Accounting Fees and Services This section discloses the fees billed by the company's independent registered public accounting firm, KPMG LLP, for fiscal years 2023 and 2022. The Audit Committee has established procedures to pre-approve all audit and permissible non-audit services provided by KPMG Fees Billed by KPMG LLP | Fee Type | Fiscal Year 2023 | Fiscal Year 2022 | | :--- | :--- | :--- | | Audit fees | $2,776,700 | $2,844,599 | | Tax fees | $547,942 | $314,719 | | All other fees | — | — | - The Audit Committee pre-approves all audit and permitted non-audit services provided by the independent auditor[918] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report. It includes a list of the consolidated financial statements contained in Item 8 and a list of all exhibits filed with the report, such as the company's certificate of incorporation, bylaws, material contracts, and various certifications - This item lists the financial statements, schedules, and exhibits filed with the Annual Report[922][923] Item 16. Form 10-K Summary This item is not applicable to the company - Not applicable[927]