Red Flag Update: 'Recession Resistant'... Really?
Quick update on Savers Value Village
Quick take…
When we added Savers Value Village ($SVV) to the Red Flag Alerts list a few days ago, we started with a yellow flag since the operator of secondhand thrift shops was days away from reporting fourth quarter results.
Now that the company has reported…
Based on the results this afternoon, we’re shifting the alert to a red flag... and not just because the company missed earnings and guided same-store sales to below expectations... or even that it suggested weaker-than-expected gross margins.
‘Uncertainty’
The clincher for us was this comment by CFO Jay Stasz, when discussing the company’s initial outlook for this year...
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 .
That’s not something you see from the same company that said this in its IPO filings last year...
In addition to being recession-resilient, growth in the secondhand market is accelerating due to a number of powerful secular trends.
Maybe it’s just us, but we tend to think that when consumers manage their discretionary spending because of economic uncertainty, recession-resistant companies should do better. In our view, this should be Savers time to shine.
A few more points…
New Store Openings
We were also perplexed by the company’s comments regarding store openings. Savers has said that it will open 22 stores this year, roughly double from a year ago. On this call it confirmed the 22 stores, but said all but three will open in the back-half of the year.
That’s simply odd and operationally difficult for any company much less a newly public one, whose store base has hovered around 300 for several years.
Same-Store Sales
New store openings aren’t the only thing that will be back-end loaded. So is same-store sales growth. Savers has been shaving same-store growth for the past few quarters. That’s not what you should want to see from a company the size of Savers that hopes to grow to 2,200 stores at some point in the future.
Potential To Raise Prices
The company's backend-loaded same-store sales guidance (0-1% in Q1, 2-3% in 2024) raises questions about it’s ability to raise prices… something we discussed in our original report.
In the fourth quarter, its 2.6% same-store sales growth was driven by traffic, with a slight decline in the average basket. For 2024, the company expects two-thirds of U.S. same-store sales to be driven by transactions and one-third by higher basket size, with modest price increases planned. In Canada, it anticipates transactions to drive comps, with a decrease in average unit price.
Thrifters are Thrifty
While driving sales through transactions (a proxy for traffic) is generally positive in retail, there’s something more nuanced that we believe most investors don’t fully understand…
This is something we can’t over-emphasize: Thrifters are thrifty and behave differently than most other shoppers.
They are extremely price-sensitive, which in theory should make them recession-resistant… as the company has claimed it is.
But push prices too hard, and they might snag only an item or two to keep their spending in check. But if prices get too high – the time and effort it takes to buy that perfect shirt is likely to lose value, which means they will simply not return, will go elsewhere or will buy new.
Bottom Line…
The lackluster, back-end-loaded guidance from a seemingly recession-resistant company appears somewhat incongruent, suggesting potential challenges in balancing price, value, and growth in the current environment.
If you missed our original report on Savers, you can read it here.
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DISCLAIMER: This is solely my opinion based on my observations and interpretations of events, based on published facts and filings, and should not be construed as personal investment advice. (Because it isn’t!) Neither author has a position in this stock.
Feel free to contact me at herbgreenberg@substack.com. You can follow me on Twitter (X) and Threads @herbgreenberg.
The old ideas of what businesses are recession proof needs to be updated. Used to be grocery stores, b/c people shopped closer to home. I expect to see Supply Chainsaw Massacre II at some point, and that would put a bid under resold items. There is a lot of good stuff in your average thrift store.
Thank you for the update. In tougher times you'd think thrift stores might be more frequented . I note all our local food pantries have unfortunately needed more assistance lately.