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Kalkine IPO Report

Should You Subscribe to the IPO of Savers Value Village Inc.?

Jun 26, 2023

The Offer

Company Overview

SVV banners collectively operate as the largest for-profit thrift operator in the United States and Canada in terms of store count. With a workforce of more than 22,000 individuals, the company manages a total of 317 stores. Savers Value Village purchases secondhand goods from their non-profit partners then process, select, price, merchandise and sell these items in their stores. Items that are not sold to their retail customers are marketed to wholesale customers, who reuse or repurpose the items they purchase from Savers Value Village.

Key Highlights

Primary Offering: The firm is issuing 18,750,000 shares along with an additional 2,812,500 shares to the underwriter, who will have a 30-day option to exercise their rights.

Use of proceeds:

  • SVV expects to generate approximately USD 272.3 million in net proceeds from the offering, assuming an assumed IPO price of USD 16.00 per share. After deducting underwriting discounts, commissions, and estimated offering expenses, the net proceeds exclude USD 10.2 million in incurred offering costs as of April 1, 2023.
  • The plan is to utilize the net proceeds of USD 272.3 million, along with around USD 8.2 million in available cash, to repay SVV's outstanding debts. This includes the principal amount, accrued and unpaid interest, and premium for both the Term Loan Facility and the Notes.
  • Under the Term Loan Facility, which matures in April 2028, SVV has outstanding borrowings of USD 579.2 million. This encompasses amounts borrowed during the establishment of the facility in April 2021 and the acquisition of 2nd Ave. in November 2021. The facility accrues interest at a variable rate based on a reference rate plus a margin ranging from 4.50% to 5.75%.
  • The Notes, maturing in April 2028, account for USD 550.0 million of SVV's outstanding borrowings. They accrue interest at a fixed rate of 9.75%. As part of the debt repayment strategy, SVV intends to redeem USD 55.0 million of the outstanding Notes at a price of 103%, along with accrued and unpaid interest.

Dividend policy:

SVV does not foresee any plans to distribute cash dividends following this offering and for the foreseeable future. The decision regarding dividend policy will be solely at the discretion of SVV's board of directors and will consider various factors, such as limitations imposed by existing and future debt agreements, financial performance, capital needs, overall financial health, prospects, and relevant provisions of Delaware law, which require dividends to be sourced from surplus or current net profits.

Business model:

Savers Value Village, Inc. is a private for-profit thrift store retailer that specializes in secondhand merchandise. The company's business model is based on four key components:

Partnership with local non-profits: Savers partners with local non-profit organizations to collect and receive donated clothing and household items. The non-profits are paid a bulk rate for the items, regardless of whether they ever make it to the sales floor. This partnership helps Savers to source inventory at a low cost, while also supporting local charities.

Reuse and recycling: Saver is committed to reuse and recycling. The company's goal is to keep as many items out of landfills as possible. To achieve this goal, Savers has a few programs in place to sort and recycle donated items. For example, the company has a program to recycle electronics, which helps to keep these items out of landfills and reduce the environmental impact of e-waste.

Value pricing: Saver’s price its items at a fraction of the cost of new merchandise. This makes the company's products accessible to a wide range of consumers. Savers also offers a few discounts and promotions, which further reduces the cost of its products.

Convenient locations: Savers has a network of over 300 stores in the United States, Canada, and Australia. This makes the company's products accessible to many consumers. Savers also offers online shopping, which makes it even more convenient for consumers to shop at the company.

Market Analysis:

  • The market for secondhand goods is experiencing rapid growth and is gaining a larger portion of the overall retail market, surpassing traditional retailers such as department stores, fast fashion brands, and off-price retailers. This market includes both resale items, such as consignment goods, and thrift goods, with thrift accounting for around 60% of the total market in 2021.
  • In the United States alone, the secondhand market reached approximately USD 35 billion in 2021 and is projected to exceed USD 82 billion by 2026, with a compound annual growth rate (CAGR) of 18% between 2022 and 2026. A survey conducted in June 2022 revealed that over 80% of consumers had engaged with a thrift store in the past year, either as shoppers, donors, or both.

  • Notably, as of April 2023, the Salvation Army and Goodwill, the leading non-profit thrift operations in the United States, operated approximately 8,000 and 3,000 locations, respectively, indicating a strong demand for secondhand goods.

Financial Highlights (Expressed in USD):

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  • Increased net sales: During the three months ended April 1, 2023, SVV experienced a growth of USD 17.5 million in retail sales, indicating a 5.6% increase compared to the corresponding period last year, April 2, 2022. This surge in net sales can be primarily attributed to the growth in comparable store sales and a net increase of 3.3% in the number of retail stores compared to the previous year. The boost in comparable store sales was primarily driven by an increase in transaction volume. On a currency-neutral and comparable stores basis, SVV's sales yield, which encompasses sales from the retail business, rose to USD 1.39 during the three months ended April 1, 2023, in contrast to USD 1.28 during the three months ended April 2, 2022. Within the wholesale segment, sales witnessed a USD 0.8 million increase, signifying a 4.3% growth during the three months ended April 1, 2023. This rise can be attributed to higher prices charged to SVV's wholesale customers, while the volume of pounds processed remained relatively consistent year over year.
  • Increased COGs: The cost of merchandise sold witnessed a growth of USD 1.8 million, representing a 1.2% increase during the three months ended April 1, 2023, in comparison to the three months ended April 2, 2022. As a percentage of net sales, the cost of merchandise sold decreased to 42.1% during the three months ended April 1, 2023, as opposed to 44.0% during the three months ended April 2, 2022. This decrease primarily resulted from the increase in sales yield and average unit retail, along with the expansion of SVV's business. Throughout the three months ended April 1, 2023, the cost of merchandise sold per pound processed remained relatively consistent at USD 0.61 per pound, compared to USD 0.60 per pound during the three months ended April 2, 2022.

Key Management Highlights

Risk Associated (High)

Investment in the IPO of “SVV” is exposed to a variety of risks such as:

  • Impact of Insufficient Quantity and Quality of Secondhand Items on SVV's Business: SVV's success hinges on acquiring enough high-quality secondhand items at affordable prices. These items are vital for determining SVV's sales yield, which measures sales per pound of processed goods. Insufficient supply of desirable items at attractive prices would harm profitability. SVV's business model relies on sourcing from and selling to the local community, emphasizing the need for quality items from community sources. Paying higher prices to non-profit partners negatively affects profitability, and lower item quality leads to markdowns and higher wholesale sales. A shortage of quality items reduces customer appeal, impacting store visits, purchase volumes, and new customer attraction. Failing to secure adequate quality items at attractive prices can severely impact SVV's business and financial performance.
  • Challenges in Obtaining Quality Secondhand Items: The success of obtaining a satisfactory quantity of quality secondhand items at attractive prices relies on maintaining relationships with existing non-profit partners (NPPs), growing operations, and developing new NPP relationships. However, numerous factors can hinder these relationships and impede the supply of quality secondhand items. Expanding operations locally requires establishing new relationships with NPPs and donors, which may not guarantee increased supply or cost-effectiveness. Failure to develop and maintain new relationships can negatively impact business growth. Economic uncertainties, governmental orders, and events like the COVID-19 pandemic can disrupt NPPs' ability to obtain donations or supply secondhand items. Insufficient volume of quality secondhand items would significantly impact sales revenue, business growth, and financial condition.
  • Risks in Sourcing and Processing Secondhand Items: The sourcing and processing of secondhand items expose SVV to various risks, including processing costs and capacity limitations, risks of item damage, loss, or contamination, increased costs to maintain and develop sources of supply, and logistical challenges. Fluctuations in the price SVV pays for secondhand items can impact its costs, while rising labor and transportation costs, along with storage expenses, driven by market forces beyond SVV's control, can increase the cost of merchandise sold. Inadequate quality or damage to received items, including contamination, may lead to additional expenses and harm SVV's reputation. Additionally, the success of SVV's relationships with NPPs is vital, and failure to establish or maintain these partnerships could hinder SVV's competitiveness and revenue growth.

Conclusion

SVV's business model revolves around several key components that contribute to its success. Firstly, the partnership with local non-profit organizations allows SVV to source inventory at a low cost while supporting local charities. This arrangement benefits both SVV and the community it operates in. Additionally, SVV's commitment to reuse and recycling helps reduce waste and environmental impact, enhancing its sustainability efforts. The value pricing strategy employed by SVV makes its products affordable and accessible to a wide range of consumers. Combined with convenient store locations and online shopping options, SVV ensures convenience and accessibility for its customers. From a financial standpoint, SVV has demonstrated strong performance. With a revenue of USD 1.44 billion in 2022, marking a 19% increase from the previous year, SVV's growth is evident. The company maintains a healthy gross profit margin of 45.2%, further highlighting its profitability. The balance sheet reveals a solid financial position, with total assets of USD 1.8 billion and a low debt-to-equity ratio of 0.61, indicating a stable capital structure.

Overall, SVV's successful business model, coupled with its strong financial health, positions the company as a thriving thrift store retailer in the market.

Hence, given the financial performance of the company, increased revenue and net income, industry analysis, use of proceeds, and associated risks “Savers Value Village Inc. (SVV)” IPO seems “Attractive" at the IPO price.


Disclaimer-

Kalkine Equities LLC provides general information about companies and their securities. The information contained in the reports, including any recommendations regarding the value of or transactions in any securities, does not take into account any of your investment objectives, financial situation or needs. Kalkine Equities LLC is not registered as an investment adviser in the U.S. with either the federal or state government. Before you make a decision about whether to invest in any securities, you should take into account your own objectives, financial situation and needs and seek independent financial advice. All information in our reports represents our views as at the date of publication and may change without notice.

Kalkine Media LLC, an affiliate of Kalkine Equities LLC, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.