Savers Value Village, Inc. (SVV) FY 2024 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis of the financial condition and results of operations of Savers Value Village, Inc. in conjunction with our audited consolidated financial statements and related notes and other financial information included in this Annual Report. This section of this Annual Report generally discusses fiscal year 2024 and 2023 items and year-to-year comparisons between fiscal years 2024 and 2023. Discussions of fiscal year 2022 items and year-to-year comparisons between fiscal years 2023 and 2022 are not included in this Annual Report on Form 10-K and can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 30, 2023, which was filed with the SEC on March 8, 2024.
Unless the context otherwise requires, all references in this section to “Savers Value Village”, “the Company”, “we”, “us” or “our” refer to the business of Savers Value Village, Inc. and its predecessor entities.
This discussion contains forward-looking statements that involve risks and uncertainties about our business and operations and reflect our plans, estimates and beliefs. Our actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under Part I, Item 1A “Risk Factors” or in other parts of this Annual Report.
Overview
We are the largest for-profit thrift operator in the United States (“U.S.”) and Canada based on number of stores and operate a total of 351 stores under the Savers®, Value Village®, Value Village Boutique™, Village des Valeurs™, Unique® and 2nd Ave.® banners. We are committed to redefining secondhand shopping by providing one-of-a-kind, low-priced merchandise ranging from quality clothing to home goods in an exciting treasure-hunt shopping environment. We purchase secondhand textiles (e.g., clothing, bedding and bath items), shoes, accessories, housewares, books and other goods from our non-profit partners (“NPPs”). We then process, select, price, merchandise and sell these items in our stores. Items that are unsuited for or unsold at retail stores are marketed to wholesale customers who reuse or repurpose the items they purchase from us. We believe our hyper-local and socially responsible procurement model, industry-leading and innovative operations, differentiated value proposition and deep relationships with our customers distinguish us from other secondhand and value-based retailers. Our business model is rooted in ESG principles, with a mission to positively impact our stakeholders: thrifters, NPPs and their donors, our team members and our stockholders. As a leader and pioneer of the for-profit thrift category, we seek to positively impact the environment by reducing waste and extending the life of reusable goods. The vast majority of the clothing and textiles we source is sold to our retail or wholesale customers.
We offer a dynamic, ever-changing selection of items, with an average unit retail (“AUR”) price of approximately $5. Our most engaged customers are members of our Super Savers Club® loyalty program. As of December 28, 2024, we had 5.9 million total active members enrolled in our U.S. and Canadian loyalty programs who have shopped with us during fiscal year 2024, compared to 5.3 million total active members as of December 30, 2023. Active members drove 72.4% of retail sales during fiscal year 2024, compared to 70.3% during fiscal year 2023.
We have innovated and invested in the development of significant operational expertise in order to integrate the three highly-complex parts of thrift operations—supply and processing, retail, and sales to wholesale markets. Our business model enables us to provide value to our NPPs and our customers, while driving attractive profitability and cash flow.
Our strategy is to locally source our merchandise by purchasing secondhand items donated to our NPPs, which provides them with revenue to support their community-focused missions. This also aids in creating a broad and diverse selection for our customers, fosters a sense of community, and reduces transportation costs and emissions typically associated with the production and distribution of new merchandise. While purchases made by our customers in our stores do not directly benefit any NPP, we pay a market-competitive contractual rate to purchase donated items.
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We source our merchandise primarily through three distinct and strategic procurement models: (i) on-site donations (“OSDs”), (ii) GreenDrop locations and (iii) delivered supply. Increasing the proportion of OSDs and GreenDrop as a percentage of total supply is desirable as donations from these sources are usually of higher quality and collectively have a lower cost than product sourced through other channels. OSDs and GreenDrop are collectively the largest part of our supply mix, accounting for 76.3% of our total pounds processed for fiscal year 2024, compared to 73.6% for fiscal year 2023.
•OSDs: Donations of items by individuals to our NPPs, made at Community Donation Centers (“CDCs”) located at our stores. We operate as a registered professional fundraiser where required, accepting donations on behalf of our NPPs. Each store is specifically designated as an OSD location for a particular NPP, such that all donations received at the CDC are credited to that NPP.
•GreenDrop locations: Attended donation stations that collect donations of items made by individuals to our NPPs at convenient and well-signed brick and mortar and trailer locations in neighborhoods surrounding a store. On behalf of our NPPs, we solicit, collect, and deliver items from our GreenDrop locations to our stores and Centralized Processing Centers (“CPCs”).
•Delivered supply: Delivered supply comprises donations delivered either to our CPCs or our stores, or both. These donations can be collected by our NPPs through a variety of methods such as neighborhood collections or donation drives, or we may solicit, collect and deliver the items on behalf of our NPPs.
We leverage an analytical platform to measure the sales yield and product margin of each stream of supply in our stores. In general, this tool is either used to periodically confirm the performance of an existing stream of supply or to evaluate the performance of a new source of supply.
Our business model is predicated on sourcing and selling quality secondhand items to our customers in local communities. We are able to meet customer demand given our deep relationships with an extensive network of NPPs that is unmatched in the thrift industry.
The majority of our retail stores have a dedicated space that handles the processing of soft and hard goods that provide the inventory to be sold on our retail sales floors. In fiscal year 2024, we processed 1.0 billion pounds of secondhand goods, compared to 984 million in fiscal year 2023. We are actively implementing our offsite processing strategy which allows us to process goods at larger-scale facilities and distribute goods to multiple stores in a local market. The processing of donations under this strategy can occur at offsite warehouse facilities, stores with surplus processing capacity or at CPCs.
Our store experience directly reflects our mission to make secondhand second nature. We deliver a well merchandised environment that maximizes customer engagement and supports a core tenet for any thrifter—the treasure hunt. Our stores offer a wide selection of quality items across clothing, home goods, books and other items at convenient locations. Our sales floor inventory is also regularly rotated and refreshed, providing our customers with an extensive, ever-changing selection at tremendous value.
In support of our efforts to extend the life of reusable goods and recover a portion of the cost of acquiring our supply of secondhand items, we sell the majority of textile items that are unsuited for or unsold at retail stores to our wholesale customers (predominantly comprised of textile graders and small business owners) who supply local communities across the globe with gently used, affordable items like clothing, housewares, toys and shoes. Textiles not suitable for reuse as secondhand clothing can be repurposed into other textile items (e.g., wiping rags) and post-consumer fibers (e.g., insulation, carpet padding), further reducing waste.
Recent Developments
Macroeconomic Conditions in Canada
The macroeconomic environment in Canada remains challenging, with elevated levels of unemployment and a high cost of living that is especially hard on low-income consumers. In periods of perceived or actual unfavorable economic conditions, consumers may reallocate their discretionary spending, which may adversely impact demand for the Company’ products and our profitability.
In response to the macroeconomic pressures in Canada, we have been actively testing different approaches to improve our Canadian business, particularly in the areas of selection and pricing, to drive foot traffic, increase conversion and improve our overall value perception among consumers.
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Share Repurchases
During fiscal year 2024, under our $50.0 million share repurchase program announced in November 2023, we repurchased 3.2 million shares at a weighted average price of $9.95 and a total cost of $31.9 million. As of December 28, 2024, the Company had $18.1 million remaining under the share repurchase program.
Derivative Financial Instruments
In April 2024, we terminated our interest rate swaps and cross currency swaps realizing net proceeds of $38.4 million.
2 Peaches Acquisition
On May 6, 2024, the Company acquired all of the equity of 2 Peaches Group, LLC (“2 Peaches”) for $5.4 million, which is comprised of cash consideration of $3.5 million, including a holdback of $0.5 million, and acquisition-related contingent consideration with an initial fair value of $1.9 million (the “2 Peaches Acquisition”). 2 Peaches is a thrift store chain with seven locations in the Atlanta, Georgia, metropolitan area. The acquired stores are the Company’s first locations in the state of Georgia and will serve as a base for the Company’s entrance and expansion into the southeast region of the U.S. Goodwill arising from the acquisition amounted to less than $0.1 million.
Revolver Upsizing
On June 27, 2024, the Company entered into a fourth amendment to its Senior Secured Credit Facilities that, among other things, increased the maximum amount available under the Revolving Credit Facility by $50.0 million to $125.0 million, and extended the maturity date of the Revolving Credit Facility from April 26, 2026 to April 26, 2027.
Partial Redemption of Senior Secured Notes
On February 6, 2025, the Company redeemed $44.5 million aggregate principal amount of Senior Secured Notes and paid accrued interest and a premium on the partial redemption. Subsequent to the partial redemption, the Company had total borrowings of $716.8 million outstanding.
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Key Performance Indicators
We use the key performance indicators below to evaluate the performance of our business, identify trends, formulate financial projections and make strategic decisions. We believe that these metrics provide useful information to investors and others in understanding and evaluating our results of operations in the same manner as our management team.
The following table summarizes our key performance indicators for the periods indicated:
| Fiscal Year | |||||
|---|---|---|---|---|---|
| 2024 | 2023 | ||||
| Comparable Store Sales (1) | |||||
| U.S. | 2.7 | % | 4.4 | % | |
| Canada | (4.0) | % | 5.0 | % | |
| Total (2) | (0.1) | % | 4.7 | % | |
| Number of Stores | |||||
| U.S. | 172 | 155 | |||
| Canada | 165 | 159 | |||
| Total (2) | 351 | 326 | |||
| Other Metrics | |||||
| Pounds processed (Ibs mm) | 1,012 | 984 | |||
| Sales yield (3) | $ | 1.46 | $ | 1.48 | |
| Cost of merchandise sold per pound processed | $ | 0.66 | $ | 0.63 |
(1)Comparable store sales is the percentage change in comparable store sales over the comparable period in the prior fiscal year. Through fiscal year 2024, we define comparable store sales to be sales by stores that have been in operation for all or a portion of two consecutive fiscal years, or, in other words, stores that are starting their third fiscal year of operation. Comparable store sales excludes stores acquired in the 2 Peaches Acquisition. For fiscal year 2023, comparable store sales excludes stores acquired in the acquisition of 2nd Ave. because those stores were not yet fully integrated during the prior year comparative period. Comparable store sales is measured in local currency for Canada, while total comparable store sales is measured on a constant-currency basis.
(2)Total comparable store sales and the total number of stores include our Australia retail locations, in addition to the U.S. and Canada.
(3)We define sales yield as retail sales generated per pound processed on a currency neutral and comparable store basis.
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Comparable store sales
Comparable store sales provides us with visibility into top-line performance on a like-for-like basis excluding new stores opened in the current or previous reporting period and excluding all closed stores as of the end of the current reporting period. We believe investors can use this metric to assess our ability to increase comparable store sales over time.
During fiscal year 2024, our comparable store sales were relatively flat. During fiscal year 2023, our comparable store sales increased 4.7%, primarily reflecting growth in transaction volume.
The Company currently defines comparable store sales to be sales by stores that have been in operation for all or a portion of two consecutive fiscal years, or, in other words, stores that are starting their third fiscal year of operation. Beginning with the first quarter of fiscal year 2025, the Company will define comparable store sales to be sales by stores that have been in operation for all or a portion of 14 months to more closely conform with common retail practice. The impact of this change to previously reported comparable store sales is de minimis and amounts for prior periods will not be recast.
Number of stores
Our number of stores provides us visibility into the scale of our operations and is viewed as a key driver of long-term growth. We believe investors can use this metric to assess our ability to open new stores in high-growth markets while reducing the number of stores in low-growth markets.
Our number of open stores increased to 351 stores as of December 28, 2024, from 326 stores as of December 30, 2023. The increase in stores resulted from the opening of ten net new stores in the U.S., six net new stores in Canada and two new stores in Australia, as well as the addition of seven stores through the 2 Peaches acquisition.
Pounds processed
We define pounds processed as the total number of pounds of goods processed during the period, excluding furniture and other large items. We process inventory by receiving goods directly from our NPPs or through OSDs and GreenDrop, sorting them, and placing them on the sales floor. This metric is an indicator of the amount of secondhand goods processed during the period and is typically a key driver of top-line sales growth. We believe investors can use this metric to assist in their evaluation of our sales growth and sales yield.
During fiscal years 2024 and 2023, we processed 1.0 billion and 984 million pounds of supply, respectively, of which 76.3% and 73.6% was comprised of supply from OSDs and GreenDrop, respectively.
Sales yield
We define sales yield as retail sales generated per pound processed on a currency neutral and comparable store basis. We believe investors can use this metric as an indicator of the quality of goods we source, because when the quality is high, we are able to sell more items and/or sell items at higher prices from the volume we process than we would otherwise.
Our sales yield for fiscal year 2024 was $1.46, compared to $1.48 for fiscal year 2023. The 1.4% decline in sales yield primarily reflects a decrease in items sold per pound processed, partially offset by items sold at higher price points.
Cost of merchandise sold per pound processed
We define cost of merchandise sold per pound processed as cost of merchandise sold, exclusive of depreciation and amortization, on a reported basis, divided by total pounds of goods processed. We believe investors can use this metric to determine our ability to cost-effectively purchase and process supply items, and determine the value of incremental sales.
Cost of merchandise sold per pound processed during fiscal years 2024 and 2023 was $0.66 and $0.63, respectively.
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Results of Operations
The following table sets forth our results of operations for each of the periods presented:
| Fiscal Year | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| 2024 | 2023 | |||||||||
| (in thousands) | Amount | % of Sales | Amount | % of Sales | ||||||
| Net sales | $ | 1,537,617 | 100.0% | $ | 1,500,249 | 100.0% | ||||
| Operating expenses: | ||||||||||
| Cost of merchandise sold, exclusive of depreciation and amortization | 669,744 | 43.6 | 619,671 | 41.3 | ||||||
| Salaries, wages and benefits | 331,023 | 21.5 | 366,189 | 24.4 | ||||||
| Selling, general and administrative | 337,131 | 21.9 | 311,388 | 20.8 | ||||||
| Depreciation and amortization | 69,530 | 4.5 | 61,144 | 4.0 | ||||||
| Total operating expenses | 1,407,428 | 91.5 | 1,358,392 | 90.5 | ||||||
| Operating income | 130,189 | 8.5 | 141,857 | 9.5 | ||||||
| Other (expense) income: | ||||||||||
| Interest expense, net | (62,444) | (4.1) | (88,500) | (5.9) | ||||||
| (Loss) gain on foreign currency, net | (14,294) | (0.9) | 6,660 | 0.4 | ||||||
| Other income, net | 71 | — | 3,688 | 0.2 | ||||||
| Loss on extinguishment of debt | (4,088) | (0.3) | (16,626) | (1.1) | ||||||
| Other expense, net | (80,755) | (5.3) | (94,778) | (6.4) | ||||||
| Income before income taxes | 49,434 | 3.2 | 47,079 | 3.1 | ||||||
| Income tax expense (benefit) | 20,404 | 1.3 | (6,036) | (0.4) | ||||||
| Net income | $ | 29,030 | 1.9% | $ | 53,115 | 3.5% |
Comparison of fiscal year 2024 and fiscal year 2023
Net sales
The following table presents net sales:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Retail sales | $ | 1,463,404 | $ | 1,427,024 | $ | 36,380 | 2.5 | % | ||||||
| Wholesale sales | 74,213 | 73,225 | 988 | 1.3 | % | |||||||||
| Total net sales | $ | 1,537,617 | $ | 1,500,249 | $ | 37,368 | 2.5 | % |
Retail sales increased by $36.4 million, or 2.5%, during fiscal year 2024, compared to fiscal year 2023. The increase in retail sales resulted primarily from growth in our store base, partially offset by the unfavorable impact of foreign currency exchange rates.
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Cost of merchandise sold, exclusive of depreciation and amortization
The following table presents cost of merchandise sold, exclusive of depreciation and amortization (“cost
of merchandise sold”):
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Cost of merchandise sold, exclusive of depreciation and amortization | $ | 669,744 | $ | 619,671 | $ | 50,073 | 8.1 | % |
Cost of merchandise sold increased 230 basis points to 43.6% of net sales during fiscal year 2024, compared to 41.3% during fiscal year 2023. The 230 basis point increase primarily reflects deleverage of cost of merchandise sold as a percentage of net sales on comparable store sales, as well as the impact of new stores and new offsite processing facilities.
Personnel costs classified within cost of merchandise sold were $393.1 million during fiscal year 2024, compared to $378.6 million during fiscal year 2023. As a percentage of net sales, personnel costs classified within cost of merchandise sold was 25.6% during fiscal year 2024, compared to 25.2% during fiscal year 2023. The $14.5 million increase in personnel costs resulted primarily from growth in our store base, the opening of new offsite processing facilities and higher wages.
Beginning in the second quarter of fiscal year 2024, we have updated the way we define personnel costs classified within cost of merchandise sold and have recast the prior period accordingly. This update had no impact on the total cost of merchandise sold. Specifically, we have updated personnel costs classified within cost of merchandise sold to include offsite processing production labor due to the continued growth of offsite processing. Historically, these costs were included in other costs classified within cost of merchandise sold.
Salaries, wages and benefits
The following table presents salaries, wages and benefits:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Retail and wholesale | $ | 201,441 | $ | 193,930 | $ | 7,511 | 3.9 | % | ||||||
| Corporate | 129,582 | 172,259 | (42,677) | (24.8) | % | |||||||||
| Total salaries, wages and benefits | $ | 331,023 | $ | 366,189 | $ | (35,166) | (9.6) | % |
Personnel costs for our retail and wholesale operations increased by $7.5 million, or 3.9%, during fiscal year 2024, compared to fiscal year 2023. The increase primarily reflects growth in our store base and higher wages, partially offset by a reduction to annual incentive plan expense.
Personnel costs for our corporate employees decreased by $42.7 million, or 24.8%, during fiscal year 2024, compared to fiscal year 2023. Adjusting for the $24.1 million special one-time bonus and related taxes incurred during fiscal year 2023 in relation to the issuance of our Senior Secured Notes and a $14.1 million decrease in IPO-related stock-based compensation expense, personnel costs for our corporate employees decreased $4.5 million primarily reflecting a reduction to annual incentive plan expense, partially offset by higher wages and non-IPO-related stock-based compensation expense.
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Selling, general and administrative
The following table presents selling, general and administrative (“SG&A”):
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Retail and wholesale | $ | 278,004 | $ | 259,031 | $ | 18,973 | 7.3 | % | ||||||
| Corporate | 59,127 | 52,357 | 6,770 | 12.9 | % | |||||||||
| Total selling, general and administrative | $ | 337,131 | $ | 311,388 | $ | 25,743 | 8.3 | % |
SG&A for our retail and wholesale operations increased by $19.0 million, or 7.3%, during fiscal year 2024, compared to fiscal year 2023. The increase resulted primarily from growth in our store base which drove an increase in rent and utilities and store pre-opening expenses. In addition, we incurred elevated security costs which were offset by reduced expenditures on repairs and maintenance.
Corporate SG&A increased by $6.8 million, or 12.9%, during fiscal year 2024, compared to fiscal year 2023. The increase primarily reflects an increase in information technology expenses and an impairment charge on our long-lived assets, partially offset by reduced expenditures on professional services.
Depreciation and amortization
The following table presents depreciation and amortization:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Depreciation and amortization | $ | 69,530 | $ | 61,144 | $ | 8,386 | 13.7 | % |
The increase in depreciation and amortization resulted primarily from investments in new stores, offsite processing and information technology, as well as capital maintenance expenditures.
Interest expense, net
The following table presents interest expense, net:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Interest expense | $ | (67,810) | $ | (93,559) | $ | 25,749 | (27.5) | % | ||||||
| Amortization of debt issuance costs and debt discount | (5,611) | (6,051) | 440 | (7.3) | % | |||||||||
| Realized and unrealized gain on interest rate swaps | 10,977 | 11,110 | (133) | (1.2) | % | |||||||||
| Total interest expense, net | $ | (62,444) | $ | (88,500) | $ | 26,056 | (29.4) | % |
The decrease in interest expense, net was primarily due to a lower weighted average face value of debt and to a lesser extent, a decrease in the weighted average interest rate. The weighted average face value of debt decreased 18.1% from $944.3 million during fiscal year 2023 to $773.8 million during fiscal year 2024 primarily due to the timing of debt repayments. Over the same period, the weighted average interest rate decreased 72 basis points from 10.18% to 9.46%. This decrease was primarily due to the execution of the Third Amendment to our Senior Secured Credit Facilities on January 30, 2024, which lowered the total margin on existing borrowings under the Term Loan Facility by 151 basis points.
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(Loss) gain on foreign currency, net
The following table presents (loss) gain on foreign currency, net:
| Fiscal Year | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | |||||||||
| (Loss) gain on foreign currency remeasurement | $ | (27,342) | $ | 9,803 | $ | (37,145) | n/m | ||||||
| Gain (loss) on derivative instruments | 13,048 | (3,143) | 16,191 | n/m | |||||||||
| Total (loss) gain on foreign currency, net | $ | (14,294) | $ | 6,660 | $ | (20,954) | n/m |
n/m - not meaningful
Gains and losses on foreign currency relate primarily to movements in the Canadian dollar (“CAD”) relative to the U.S. dollar (“USD”). In fiscal year 2024, the USD strengthened against CAD resulting in remeasurement losses of $27.3 million arising primarily on USD-denominated debt held by one of our Canadian subsidiaries, which was the primary driver of foreign currency remeasurement gains and losses in both fiscal year 2024 and fiscal year 2023. We also recorded gains of $13.0 million in fiscal year 2024 on derivative instruments that we use to manage foreign currency exchange rate risk. The $9.8 million gain on foreign currency remeasurement in fiscal year 2023 resulted primarily from USD weakening against CAD, partially offset by losses of $3.1 million on derivative instruments that we use to manage foreign currency exchange rate risk.
Other income, net
The following table presents other income, net:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Other income, net | $ | 71 | $ | 3,688 | $ | (3,617) | (98.1) | % |
Other income, net is comprised primarily of miscellaneous income and expenses not directly related to our core operating activities.
Loss on extinguishment of debt
The following table presents loss on extinguishment of debt:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Loss on extinguishment of debt | $ | (4,088) | $ | (16,626) | $ | 12,538 | (75.4) | % |
In fiscal year 2024, loss on extinguishment of debt of $4.1 million comprised of $0.7 million associated with the repricing of outstanding borrowings under our Term Loan Facility and $3.4 million associated with the redemption of $49.5 million aggregate principal amount of Senior Secured Notes.
In fiscal year 2023, the Company used net proceeds from its IPO, net proceeds from issuing $550.0 million aggregate principal amount of Senior Secured Notes and cash on hand to repay $485.8 million in outstanding borrowings on its Term Loan Facility and $55.0 million aggregate principal amount of its Senior Secured Notes, resulting in a loss on extinguishment of debt of $16.6 million.
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Income tax expense (benefit)
The following table presents income tax expense (benefit):
| Fiscal Year | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | |||||||||
| Income tax expense (benefit) | $ | 20,404 | $ | (6,036) | $ | 26,440 | n/m |
n/m - not meaningful
During fiscal year 2024, the Company recorded income tax expense of $20.4 million on income before income taxes of $49.4 million, resulting in an effective tax rate of 41.3%. During fiscal year 2023, the Company recorded an income tax benefit of $6.0 million on income before income taxes of $47.1 million, resulting in an effective tax rate of (12.8)%. The increase in our effective tax rate resulted primarily from the internal legal entity restructuring that occurred during fiscal year 2023 as discussed in Note 15. Income Taxes, and an increase to the valuation allowance.
Segment results
The following table presents net sales and profit by segment:
| Fiscal Year | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | $ Change | % Change | ||||||||||
| Net sales: | ||||||||||||||
| U.S. Retail | $ | 832,581 | $ | 780,126 | $ | 52,455 | 6.7 | % | ||||||
| Canada Retail | 586,971 | 605,630 | (18,659) | (3.1) | % | |||||||||
| Total segment sales | $ | 1,419,552 | $ | 1,385,756 | $ | 33,796 | 2.4 | % | ||||||
| Segment profit: | ||||||||||||||
| U.S. Retail | $ | 187,233 | $ | 198,146 | $ | (10,913) | (5.5) | % | ||||||
| Canada Retail | $ | 165,136 | $ | 189,899 | $ | (24,763) | (13.0) | % |
U.S. Retail
U.S. Retail sales increased by $52.5 million, or 6.7%, during fiscal year 2024, compared to fiscal year 2023. The increase in U.S. Retail sales resulted from growth in our store base, as well as a 2.7% increase in comparable store sales. The increase in comparable store sales was driven by higher transactions and average basket.
U.S. Retail segment profit decreased by $10.9 million, or 5.5%, during fiscal year 2024, compared to fiscal year 2023. The decrease in U.S. Retail segment profit primarily reflects the impact of new stores, including store pre-opening expenses, and the impact of new offsite processing facilities.
Canada Retail
Canada Retail sales decreased by $18.7 million, or 3.1%, during fiscal year 2024, compared to fiscal year 2023. The decrease in Canada Retail sales resulted from a 4.0% decrease in comparable store sales and the unfavorable impact of foreign currency exchange rates, partially offset by growth in our store base. The decline in comparable store sales was primarily driven by a decrease in transactions.
Canada Retail segment profit decreased by $24.8 million, or 13.0%, during fiscal year 2024, compared to fiscal year 2023. The decrease in Canada Retail segment profit primarily reflects deleverage of expenses as a percentage of net sales on comparable store sales.
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Non-GAAP Financial Measures
The Company reports its financial results in accordance with GAAP. We also present the following non-GAAP financial measures: Adjusted net income, Adjusted net income per diluted share, Adjusted EBITDA, Adjusted EBITDA margin and Constant-currency net sales. In the discussion that follows, we provide definitions and reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP. We have provided this non-GAAP financial information, which is not calculated or presented in accordance with GAAP, as information supplemental to, and in addition to, the financial measures presented in this Annual Report that are calculated and presented in accordance with GAAP. These non-GAAP financial measures should not be considered superior to, as a substitute for, or an alternative to, and should be considered in conjunction with, the GAAP financial measures presented elsewhere in this Annual Report. These non-GAAP financial measures may differ from, and therefore may not be directly comparable to, similarly-titled measures used by other companies.
Adjusted net income, Adjusted net income per diluted share, Adjusted EBITDA and Adjusted EBITDA margin
Adjusted net income, Adjusted net income per diluted share, Adjusted EBITDA and Adjusted EBITDA margin are non-GAAP financial measures. We have included these non-GAAP financial measures as these are key measures used by our management and our board of directors to evaluate our operating performance and the effectiveness of our business strategies, make budgeting decisions, and evaluate compensation decisions. The Company presents Adjusted net income, Adjusted net income per diluted share, Adjusted EBITDA and Adjusted EBITDA margin because it considers these meaningful measures to share with investors as they best allow comparison of the performance of one period with that of another period. In addition, by presenting Adjusted net income, Adjusted net income per diluted share, Adjusted EBITDA and Adjusted EBITDA margin, the Company provides investors with management’s perspective of the Company’s operating performance.
Adjusted net income through fiscal year 2024 is defined as net income excluding the impact of loss on extinguishment of debt, IPO-related stock-based compensation expense, transaction costs, dividend-related bonus, loss (gain) on foreign currency, net, executive transition costs, certain other adjustments, the tax effect on the above adjustments, excess tax benefit from stock-based compensation and non-recurring tax benefit. Tax effect on adjustments as defined through fiscal year 2024 is calculated based on the overall effective tax rate for the respective years. We define Adjusted net income per diluted share as Adjusted net income divided by diluted weighted average common shares outstanding.
Adjusted EBITDA through fiscal year 2024 is defined as net income excluding the impact of interest expense, net, income tax expense (benefit), depreciation and amortization, loss on extinguishment of debt, stock-based compensation expense, non-cash occupancy-related costs, lease intangible asset expense, pre-opening expenses, store closing expenses, executive transition costs, transaction costs, dividend-related bonuses, loss (gain) on foreign currency, net, and certain other adjustments. We define Adjusted EBITDA margin as Adjusted EBITDA divided by net sales, expressed as a percentage.
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Beginning in fiscal year 2025, the Company is adjusting its approach for calculating the tax effect on adjustments within its Adjusted net income and Adjusted net income per diluted share metrics. Through fiscal year 2024, the Company applied the overall effective tax rate for the year to the respective adjustments in determining Adjusted net income and Adjusted net income per diluted share. Effective fiscal year 2025, the Company will utilize the tax rate specifically applicable to the respective adjustments. Details of these changes and a reconciliation of the definitions prior to fiscal year 2025 to the go-forward definition is presented in the table and related footnotes below.
A reconciliation of GAAP net income and GAAP net income per diluted share to Adjusted net income and Adjusted net income per diluted share is presented in the table below:
| Fiscal Year | |||||
|---|---|---|---|---|---|
| (in thousands, except per share amounts) | 2024 | 2023 | |||
| Net income: | |||||
| Net income | $ | 29,030 | $ | 53,115 | |
| Loss on extinguishment of debt(1)(2) | 4,088 | 16,626 | |||
| IPO-related stock-based compensation expense(1)(3) | 54,981 | 69,108 | |||
| Transaction costs(1)(4) | 2,621 | 3,103 | |||
| Dividend-related bonus(1)(5) | — | 24,097 | |||
| Loss (gain) on foreign currency, net(1) | 14,294 | (6,660) | |||
| Executive transition costs(1)(6) | 689 | — | |||
| Other adjustments(1)(7) | 4,312 | (3,260) | |||
| Tax effect on adjustments(8) | (33,447) | (29,874) | |||
| Excess tax benefit from stock-based compensation | (2,321) | — | |||
| Non-recurring tax benefit(9) | — | (31,340) | |||
| Adjusted net income, as defined through fiscal year 2024 | 74,247 | 94,915 | |||
| Tax effect on adjustments(8) | 33,447 | 29,874 | |||
| Tax effect on adjustments, as defined beginning fiscal year 2025(10) | (10,810) | (15,734) | |||
| Adjusted net income, as defined beginning fiscal year 2025 | $ | 96,884 | $ | 109,055 | |
| Net income per share, diluted: | |||||
| Net income per share, diluted | $ | 0.17 | $ | 0.34 | |
| Loss on extinguishment of debt(1)(2) | 0.02 | 0.11 | |||
| IPO-related stock-based compensation expense(1)(3) | 0.33 | 0.44 | |||
| Transaction costs(1)(4) | 0.02 | 0.02 | |||
| Dividend-related bonus(1)(5) | — | 0.15 | |||
| Loss (gain) on foreign currency, net(1) | 0.09 | (0.04) | |||
| Executive transition costs(1)(6) | — | — | |||
| Other adjustments(1)(7) | 0.03 | (0.02) | |||
| Tax effect on adjustments(8) | (0.20) | (0.19) | |||
| Excess tax benefit from stock-based compensation | (0.01) | — | |||
| Non-recurring tax benefit(9) | — | (0.20) | |||
| Adjusted net income per share, diluted, as defined through fiscal year 2024* | 0.45 | 0.61 | |||
| Tax effect on adjustments(8) | 0.20 | 0.19 | |||
| Tax effect on adjustments, as defined beginning fiscal year 2025(10) | (0.06) | (0.10) | |||
| Adjusted net income per share, diluted, as defined beginning fiscal year 2025* | $ | 0.58 | $ | 0.70 |
*May not foot due to rounding
(1)Presented pre-tax.
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(2)Removes the effects of the loss on debt extinguishment in relation to the repricing of outstanding borrowings under the Term Loan Facility on January 30, 2024, the partial repayment of outstanding borrowings under the Term Loan Facility on July 5, 2023 and February 6, 2023, and the partial redemption of our Senior Secured Notes on March 4, 2024 and July 3, 2023.
(3)Represents stock-based compensation expense for performance-based options triggered by completion of our IPO and expense related to restricted stock units issued in connection with the Company’s IPO.
(4)Transaction costs are comprised of non-capitalizable expenses related to offering costs, debt transactions and acquisitions.
(5)Represents dividend-related bonus and related payroll taxes paid in conjunction with our February 2023 dividends.
(6)Represents severance costs associated with executive leadership changes and retention costs associated with the 2 Peaches acquisition.
(7)Other adjustments include the effect of asset disposals. Fiscal year 2024 also includes an impairment charge on long-lived assets of $4.3 million. Fiscal year 2023 also includes legal and insurance settlement proceeds of $4.7 million.
(8)Tax effect on adjustments as defined through fiscal year 2024 is calculated based on the overall effective tax rate for the respective periods. The effective tax rate for fiscal year 2023 is adjusted to remove Section 162(m) limitations and the tax benefit of restructuring.
(9)Represents a one-time tax benefit of $31.3 million associated with an internal legal entity restructuring in fiscal year 2023.
(10)Tax effect on adjustments as defined beginning in fiscal year 2025 is calculated utilizing the tax rate specifically applicable to the respective adjustments.
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Beginning in fiscal year 2025, the Company is updating its definition of Adjusted EBITDA to include non-cash occupancy-related costs, pre-opening expenses and store closing expenses, all of which were excluded under its previous definition of Adjusted EBITDA. Details of these changes and a reconciliation of the definitions prior to fiscal year 2025 to the go-forward definition is presented in the table and related footnotes below.
A reconciliation of GAAP net income to Adjusted EBITDA is presented in the table below:
| Fiscal Year | |||||
|---|---|---|---|---|---|
| (dollars in thousands) | 2024 | 2023 | |||
| Net income | $ | 29,030 | $ | 53,115 | |
| Interest expense, net | 62,444 | 88,500 | |||
| Income tax expense (benefit) | 20,404 | (6,036) | |||
| Depreciation and amortization | 69,530 | 61,144 | |||
| Loss on extinguishment of debt(1) | 4,088 | 16,626 | |||
| Stock-based compensation expense(2) | 61,636 | 72,604 | |||
| Non-cash occupancy-related costs(3) | 7,943 | 5,902 | |||
| Lease intangible asset expense(4) | 3,531 | 4,093 | |||
| Pre-opening expenses(5) | 14,768 | 7,536 | |||
| Store closing expenses(6) | 874 | 1,613 | |||
| Executive transition costs(7) | 689 | — | |||
| Transaction costs(8) | 2,621 | 3,103 | |||
| Dividend-related bonus(9) | — | 24,097 | |||
| Loss (gain) on foreign currency, net | 14,294 | (6,660) | |||
| Other adjustments(10) | 4,312 | (3,260) | |||
| Adjusted EBITDA, as defined through fiscal year 2024 | 296,164 | 322,377 | |||
| Non-cash occupancy-related costs(3) | (7,943) | (5,902) | |||
| Pre-opening expenses(5) | (14,768) | (7,536) | |||
| Store closing expenses(6) | (874) | (1,613) | |||
| Adjusted EBITDA, as defined beginning fiscal year 2025 | $ | 272,579 | $ | 307,326 | |
| Net income margin | 1.9% | 3.5% | |||
| Adjusted EBITDA margin, as defined through fiscal year 2024 | 19.3% | 21.5% | |||
| Adjusted EBITDA margin, as defined beginning fiscal year 2025 | 17.7% | 20.5% |
(1)Removes the effects of the loss on debt extinguishment in relation to the repricing of outstanding borrowings under the Term Loan Facility on January 30, 2024, the partial repayment of outstanding borrowings under the Term Loan Facility on July 5, 2023 and February 6, 2023, and the partial redemption of our Senior Secured Notes on March 4, 2024 and July 3, 2023.
(2)Represents non-cash stock-based compensation expense related to stock options and restricted stock units granted to certain of our employees and directors.
(3)Represents the difference between cash payments and straight-line lease expense.
(4)Represents lease expense associated with acquired lease intangibles. Prior to the adoption of Topic 842, this expense was included within depreciation and amortization.
(5)Pre-opening expenses include expenses incurred in the preparation and opening of new stores and processing locations, such as payroll, training, travel, occupancy and supplies.
(6)Costs associated with the closing of certain retail locations, including lease termination costs, amounts paid to third parties for rent reduction negotiations, and fees paid to landlords for store closings.
(7)Represents severance costs associated with executive leadership changes and retention costs associated with acquisitions.
(8)Transaction costs are comprised of non-capitalizable expenses related to offering costs, debt transactions and acquisitions.
(9)Represents dividend-related bonus and related payroll taxes paid in conjunction with our February 2023 dividends.
(10)Other adjustments include the effect of asset disposals. Fiscal year 2024 also includes an impairment charge on long-lived assets of $4.3 million. Fiscal year 2023 also includes legal and insurance settlement proceeds of $4.7 million.
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Constant-currency
The Company reports certain operating results on a constant-currency basis in order to facilitate period-to-period comparisons of its results without regard to the impact of fluctuating foreign currency exchange rates. The term foreign currency exchange rates refers to the exchange rates used to translate the Company's operating results for all countries where the functional currency is not the USD into USD. Because the Company is a global company, foreign currency exchange rates used for translation may have a significant effect on its reported results. In general, given the Company's significant operations in Canada, the Company's financial results are affected positively by a weakening of the USD against CAD and are affected negatively by a strengthening of the USD against CAD. References to operating results on a constant-currency basis mean operating results without the impact of foreign currency exchange rate fluctuations.
The Company believes disclosure of constant-currency net sales is helpful to investors because it facilitates period-to-period comparisons of its results by increasing the transparency of its underlying performance by excluding the impact of fluctuating foreign currency exchange rates. Constant-currency results have no standardized meaning prescribed by GAAP, are not prepared under any comprehensive set of accounting rules or principles and should be read in conjunction with the Company's consolidated financial statements prepared in accordance with GAAP.
Constant-currency results have limitations in their usefulness to investors and may be calculated differently from, and therefore may not be directly comparable to, similarly titled measures used by other companies.
Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. During fiscal year 2024, as compared to fiscal year 2023, the USD was stronger relative to CAD and the Australian dollar (“AUD”) which resulted in an unfavorable foreign currency impact on our operating results. The Company calculates constant-currency net sales by translating current-period net sales using the average exchange rates from the comparative prior period rather than the actual average exchange rates in effect.
A reconciliation of GAAP net sales to constant-currency net sales is presented in the table below:
| (dollars in thousands) | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Fiscal Year 2024 | Net Sales | Impact of Foreign Currency | Constant-Currency Net Sales | $ Change Over Prior Year | % Change Over Prior Year | |||||||||||||
| U.S. Retail | $ | 832,581 | $ | — | $ | 832,581 | $ | 52,455 | 6.7 | % | ||||||||
| Canada Retail | 586,971 | 9,009 | 595,980 | (9,650) | (1.6) | % | ||||||||||||
| Other | 118,065 | 449 | 118,514 | 4,021 | 3.5 | % | ||||||||||||
| Total net sales | $ | 1,537,617 | $ | 9,458 | $ | 1,547,075 | $ | 46,826 | 3.1 | % | ||||||||
| Fiscal Year 2023 | ||||||||||||||||||
| U.S. Retail | $ | 780,126 | n/a | $ | 780,126 | n/a | n/a | |||||||||||
| Canada Retail | 605,630 | n/a | 605,630 | n/a | n/a | |||||||||||||
| Other | 114,493 | n/a | 114,493 | n/a | n/a | |||||||||||||
| Total net sales | $ | 1,500,249 | n/a | $ | 1,500,249 | n/a | n/a |
n/a - not applicable
Liquidity and Capital Resources
Overview
We have historically financed our operations primarily with cash generated by operating activities and proceeds from debt issuances. These sources of liquidity and capital have also been the primary means by which we funded a dividend payment of $262.2 million in fiscal year 2023. Although we do not anticipate paying any cash dividends in the foreseeable future, any future determination relating to dividend policy will be made at the discretion of our board of directors and will depend on a number of factors, including restrictions in our current and future debt instruments, our future earnings, capital requirements, financial condition, prospects, and applicable Delaware law, which provides that dividends are only payable out of surplus or current net profits.
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Our primary short-term requirements for liquidity and capital are to meet general working capital needs, fund capital expenditures and to make interest payments on our debt. Our primary long-term liquidity and capital needs relate to repaying the principal balance on our debt and making lease payments on our retail stores and processing facilities. We may also use cash on our balance sheet, cash generated from operations or proceeds from new borrowings, or any combination of these sources of liquidity and capital, to pay for acquisitions, to fund growth initiatives, to pay down debt or to conduct repurchases of our common stock under our share repurchase program, or any combination of the foregoing. Our primary sources of liquidity and capital are cash generated from operations and proceeds from borrowings, including borrowings on our Revolving Credit Facility. As of December 28, 2024, $123.8 million was available to borrow under the Revolving Credit Facility.
We believe our existing cash and cash equivalents and cash provided by our operating activities are sufficient to fund our liquidity needs for the next 12 months.
See Note 7. Indebtedness to our audited consolidated financial statements for details of our indebtedness.
Share repurchase authorization
We announced on November 9, 2023 the authorization of a share repurchase program of up to $50.0 million of our common stock. Under the program, we may purchase shares from time to time in compliance with applicable securities laws, that may include Securities Act Rule 10b-18. The program is currently set to expire on November 8, 2025. Although our Board of Directors has authorized the share repurchase program, we are not obligated to repurchase any specific dollar amount or to acquire any specific number of shares under the program. In addition, the share repurchase program may be suspended, modified, or terminated at any time without prior notice. The amount, timing, and execution of our share repurchase program will be based upon a variety of factors, including the share price of our common stock, general market conditions, alternative uses for capital, our financial performance, and other considerations. Any repurchases will be funded by available cash and cash equivalents.
Cash Flows
The following table summarizes our cash flows for the periods indicated:
| Fiscal Year | ||||||
|---|---|---|---|---|---|---|
| (in thousands) | 2024 | 2023 | ||||
| Net cash provided by operating activities | $ | 134,276 | $ | 175,165 | ||
| Net cash used in investing activities | (80,523) | (92,365) | ||||
| Net cash used in financing activities | (76,630) | (17,044) | ||||
| Effect of exchange rate changes on cash and cash equivalents | (7,111) | 2,067 | ||||
| Net change in cash and cash equivalents | $ | (29,988) | $ | 67,823 |
Comparison of fiscal year 2024 and fiscal year 2023
Net cash provided by operating activities
Net cash provided by operating activities was $134.3 million for fiscal year 2024, compared to $175.2 million for fiscal year 2023, a decrease of $40.9 million. The $40.9 million decrease is primarily due to a $25.7 million increase in income taxes paid, net and an $11.7 million decrease in operating income.
Net cash used in changes in operating assets and liabilities during fiscal year 2024 consisted primarily of a $122.6 million change in operating lease liabilities and a $10.7 million change in accrued payroll and related taxes. The change in operating lease liabilities resulted from lease payments. The change in accrued payroll and related taxes resulted primarily from the annual payment of incentive compensation to our employees, partially offset by increases in accrued payroll and insurance reserves. As of December 30, 2023, we had accrued $24.4 million for employee incentive compensation which was paid during the first quarter of fiscal year 2024. As of December 28, 2024, we had accrued $7.9 million for employee incentive compensation, the majority of which we plan to pay during the first quarter of fiscal year 2025.
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Net cash used in changes in operating assets and liabilities during fiscal year 2023 consisted primarily of a $110.4 million change in operating lease liabilities and a $10.9 million change in inventory. The change in operating lease liabilities resulted from lease payments. The change in inventories is primarily due to the timing of processing and higher processing costs.
Net cash used in investing activities
Net cash used in investing activities was $80.5 million for fiscal year 2024 and $92.4 million for fiscal year 2023. Expenditure in both periods consisted primarily of investments in new stores, offsite processing and information technology, as well as capital maintenance expenditures. In fiscal year 2024, we also received net proceeds of $28.5 million on settlement of derivative instruments, including $28.1 million related to the April 2024 termination of our cross currency swaps, and made a net payment of $3.2 million related to the 2 Peaches Acquisition.
Net cash used in financing activities
Net cash used in financing activities was $76.6 million for fiscal year 2024, consisting primarily of $55.5 million of principal payments on our long-term debt and $31.7 million of share repurchases under our $50.0 million share repurchase program, partially offset by net proceeds of $11.9 million related to settlement of an interest rate swap with an other-than-insignificant financing element at inception, including $9.6 million related to the April 2024 termination of the aforementioned interest rate swap.
Net cash used in financing activities was $17.0 million for fiscal year 2023, consisting primarily of $524.9 million of net proceeds from the issuance of our Senior Secured Notes and $305.7 million of net proceeds from our IPO, offset by $547.9 million of principal payments on our long-term debt, the payment of $262.2 million in dividends and a net repayment of $42.0 million on our Revolving Credit Facility.
Critical Accounting Estimates
Our consolidated financial statements and the accompanying notes thereto included elsewhere in this Annual Report are prepared in accordance with GAAP. Preparation of our consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expenses and various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from our estimates under different assumptions or conditions. To the extent that there are differences between our estimates and actual results, our future financial statement presentation, financial condition, results of operations, and cash flows will be affected. We believe that the assumptions and estimates associated with the impairment assessments of our goodwill and indefinite-lived intangible assets and income taxes have the greatest potential impact on our consolidated financial statements. Accordingly, we believe these policies are most critical to aid in fully understanding and evaluating our Consolidated Balance Sheets, Consolidated Statements of Operations and Comprehensive Income, and Consolidated Statements of Cash Flows.
Impairment of goodwill and indefinite-lived intangible assets
We assess goodwill and our indefinite-lived intangible assets for impairment annually, or more frequently if events or changes in circumstances indicate that an asset may be impaired. We assess definite-lived intangible assets and other long-lived assets (collectively, “long-lived assets”) for impairment whenever events or changes in circumstances indicate the carrying amount of an asset or asset group may not be recoverable.
We account for acquired businesses using the acquisition method of accounting which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective fair values with the differences between consideration and net assets acquired being recorded as goodwill.
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Goodwill is reviewed for impairment annually in the Company’s fourth quarter and whenever circumstances indicate goodwill might be impaired. The Company has the option of performing a qualitative assessment that involves evaluating relevant events and circumstances to determine whether it is more likely than not (i.e. a likelihood of greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If not, no further impairment testing is performed. If the assessment indicates that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company performs a quantitative assessment by comparing the carrying value of the reporting unit to the estimated fair value of the reporting unit, both as of the testing date. If the carrying value of the reporting unit exceeds the estimated fair value, the Company will recognize an impairment charge equal to the amount by which the carrying value exceeds the reporting unit’s estimated fair value up to but not to exceed the total amount of goodwill allocated to the reporting unit.
While the Company generally performs a qualitative assessment, we may choose periodically to forgo the qualitative assessment and proceed directly to a quantitative analysis. Factors considered in determining whether to forgo the qualitative assessment and proceed directly to the quantitative analysis include the significance of the excess of a reporting unit’s estimated fair value over its carrying value at the last quantitative assessment date, the amount of time between quantitative assessments, the desirability of establishing an updated baseline quantitative analysis, and other performance and market indicators. In fiscal year 2024, we forwent the qualitative assessment by performing a quantitative analysis and concluded that the fair values of both our reporting units were substantially higher than their carrying values.
Similar to goodwill, our indefinite-lived trade names and trademarks are not amortized, but reviewed for impairment annually, or more frequently if events or changes in circumstances indicate that the asset may be impaired. In fiscal year 2024, we forwent the qualitative assessment by performing a quantitative analysis and concluded that the fair values of our indefinite-lived trade names and trademarks were substantially higher than their carrying values.
Each reporting period, we perform an evaluation of the remaining useful life of our indefinite-lived trade names and trademarks to determine whether events and circumstances continue to support an indefinite life. We consider the life of our indefinite-lived trade names and trademarks to be appropriate.
Income taxes
Management makes estimates, assumptions, and judgments to determine our provision for income taxes, deferred tax assets and liabilities, and any valuation allowance recorded against deferred tax assets. We utilize the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, as well as operating loss, capital loss, and tax credit carryforwards. A valuation allowance is established against deferred tax assets if it is more likely than not that they will not be realized. Income tax expense represents the current expense incurred for the period plus or minus the change during the period in net deferred tax assets and liabilities.
Recent Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies to our audited consolidated financial statements for a description of recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted.