Savers Value Village Inc

Notes to Interim Condensed Consolidated Financial Statements (unaudited)

Note 1. Description of Business and Basis of Presentation

Description of business

Savers Value Village, Inc., a Washington State based company, together with its wholly owned subsidiaries (the “Company”, “we”, “us” or “our”), sells second-hand merchandise primarily in retail stores located in the United States (“U.S.”), Canada and Australia.

Basis of presentation

The accompanying interim condensed consolidated financial statements as of March 30, 2024 and for the thirteen weeks ended March 30, 2024 and April 1, 2023, have not been audited but, in the opinion of management, contain all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the financial statements. The condensed consolidated balance sheet at December 30, 2023, has been derived from the audited financial statements at that date but does not include all of the disclosures required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements. These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the fiscal year ended December 30, 2023, and related notes included in the most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 8, 2024. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year, which ends on the Saturday nearest to December 31.

All dollar and share amounts in the notes to these unaudited interim condensed consolidated financial statements, with the exception of per share amounts, are rounded to the nearest thousand unless otherwise indicated.

Note 2. Summary of Significant Accounting Policies

There have been no material changes to the Company’s significant accounting policies as described in the Company’s consolidated financial statements as of and for the fiscal year ended December 30, 2023.

Use of estimates

The preparation of these unaudited interim condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. These estimates are based on available information and on various other assumptions that are believed to be reasonable under the circumstances. Certain items subject to such estimates and assumptions include, but are not limited to, the valuation of insurance reserves, the valuation of intangibles, the valuation of goodwill, income taxes and stock-based compensation. Actual results could vary from those estimates under different assumptions or conditions.

Revenue recognition

The following table disaggregates our revenue by retail and wholesale during each of the periods presented:

Recently issued accounting pronouncements not yet adopted

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update require enhanced disclosures about significant expenses on an annual and interim basis for all public entities. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is currently in the process of evaluating the effects of this pronouncement on its related disclosures.

In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update require that public business entities on an annual basis disclose specific categories in the rate reconciliation table, provide additional information for reconciling items that meet a quantitative threshold and provide additional information about income taxes paid. The amendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. The Company is currently in the process of evaluating the effects of this pronouncement on its related disclosures.

Note 3. Indebtedness

Debt consisted of the following:

On January 30, 2024, the Company entered into an amendment (the “Third Amendment”) to its Senior Secured Credit Facilities. Among other things, the Third Amendment (i) removes the SOFR adjustment margin, (ii) reduces the margin on existing borrowings under the Term Loan Facility from a range of 4.25% to 5.50% to a range of 2.75% to 4.00%, (iii) revises the leverage-based pricing grid applicable to borrowings under the Term Loan Facility such that, among other things, a lower leverage ratio than was previously required is needed to obtain a 0.25% reduction in margin, (iv) provides for a 0.25% reduction of the margin applicable to term loan borrowings if the Company achieves certain public corporate family ratings and (v) increases the limit on the customary incremental uncommitted revolving credit facility that does not require consent of the required lenders to the greater of (a) $102.0 million and (b)50% of EBITDA for the prior four quarters. The Third Amendment resulted in a loss on extinguishment of debt of $0.7 million.

On February 9, 2024, the Company achieved the public corporate family ratings required for a 0.25% reduction of the margin applicable to its term loan borrowings.

On March 4, 2024, the Company redeemed $49.5 million aggregate principal amount of Senior Secured Notes, equal to 10% of the outstanding balance at December 30, 2023. In addition to paying accrued interest, the Company paid a premium of 3%, or $1.5 million, on the partial redemption. This transaction resulted in a loss on extinguishment of debt of $3.4 million.

As of March 30, 2024, there wereno advances on the Revolving Credit Facility, there were $1.2 million of letters of credit outstanding and $73.8 million was available to borrow.

Note 4. Fair Value Measurements

The Company utilizes fair value measurements for its financial assets and financial liabilities and fair value measurements of nonfinancial items that are recognized or disclosed at fair value in the financial statements on a recurring basis. Fair value is based upon a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to measurements involving significant unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

•Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

•Level 2 inputs are inputs other than unadjusted quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

•Level 3 inputs are unobservable inputs for the asset or liability.

The level in the fair value hierarchy within which a fair value measurement in its entirety falls is based on the lowest level input that is significant to the fair value measurement.

The following table presents financial assets and financial liabilities that are measured at fair value on a recurring basis at March 30, 2024:

The following table presents financial assets and financial liabilities that are measured at fair value on a recurring basis at December 30, 2023:

Money market funds consist of short-term deposits with an original maturity of three months or less. Interest rate swaps, cross currency swaps and forward contracts are fair valued using independent pricing services and the Company obtains an understanding of the methods used in pricing. As such, these derivative instruments are classified within Level 2.

The fair value of the Company’s Senior Secured Notes, based on Level 1 inputs, was $480.3 million and $525.5 million at March 30, 2024 and December 30, 2023, respectively. The fair value of borrowings under the Company’s Senior Secured Credit Facilities approximate their carrying value as the current rates approximate rates on similar debt and were based on rate notices provided by the Administrative Agent (Level 2 inputs) at March 30, 2024 and December 30, 2023.

Note 5. Derivative Financial Instruments

As a result of its operating and financing activities, the Company is exposed to market risks from changes in interest and foreign currency exchange rates. These market risks may adversely affect the Company’s operating results, cash flows and financial position. The Company seeks to manage risk from changes in interest and foreign currency exchange rates through the use of derivative financial instruments. Derivative contracts are not collateralized and are entered into with large, reputable financial institutions that are monitored for counterparty risk. Refer to Note 4 for information on the fair value of our derivative instruments.

Foreign currency contracts

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company uses derivative financial instruments to manage its exposure to foreign currency exchange rate risk, specifically U.S. Dollar (“USD”) – Canadian Dollar (“CAD”) cross currency swaps and forward sales of CAD. These instruments lock in the exchange rate for a portion of the estimated cash flows of the Company’s Canadian operations. As of March 30, 2024 and December 30, 2023, cross currency swaps with notional amounts of $275.0 million were outstanding. Additionally, as of March 30, 2024 and December 30, 2023, the Company’s forward contracts had USD equivalent gross notional amounts of $59.8 million and $33.2 million, respectively. In April 2024, the Company terminated its cross currency swaps, resulting in net proceeds of $28.1 million.

Interest rate swap contracts

The Company’s market risk is affected by changes in interest rates. The Company’s Senior Secured Credit Facilities bear interest based on market rates plus an applicable margin. Because the interest rate on the Company’s floating-rate debt is tied to market rates, the Company manages its exposure to interest rate movements by effectively converting a portion of its floating-rate debt to fixed-rate debt. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount.

The Company has agreements with each of its derivative counterparties that contain a provision whereby the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on its indebtedness.

At March 30, 2024 and December 30, 2023, interest rate swaps with notional amounts of $275.0 million were outstanding. In April 2024, the Company terminated its interest rate swaps, resulting in net proceeds of $10.3 million.

The fair values of cross currency swap contracts, forward contracts and interest rate swap contracts were as follows:

The impact of derivative financial instruments on the unaudited interim condensed consolidated statements of operations and comprehensive loss was as follows:

The table below presents the effect of cash flow hedge accounting on other comprehensive loss, net of tax:

Amounts reclassified from accumulated other comprehensive income into net loss are recognized in interest expense, net. Within the next 12 months, the Company estimates that an additional $10.8 million of gains currently recognized within accumulated other comprehensive income will be reclassified as a decrease in interest expense, net.

Note 6. Segment Information

The Company hastwo reportable segments: U.S. Retail and Canada Retail. In addition to itstwo reportable segments, the Company has retail stores in Australia and wholesale operations, both of which are classified within Other.

The Company evaluates the performance of its segments based on Segment Profit, which it defines as operating income, exclusive of corporate overhead and allocations, asset impairments as applicable, and certain separately disclosed unusual or infrequent items. Segment Profit, as defined herein, may not be comparable to similarly titled measures used by other entities. These measures should not be considered as alternatives to our GAAP measures of Operating income, Net loss, or cash flows from operating activities as an indicator of the Company’s performance or as a measure of its liquidity.

Our segment results were as follows:

Note 7. Net Loss Per Share

Basic and diluted net loss per share were as follows:

(1)For the thirteen weeks ended March 30, 2024, the calculation of diluted net loss per share excludes the effect of 8,118 potential shares of common stock relating to awards of stock options and restricted stock units that, if exercised, would have been antidilutive. For the thirteen weeks ended April 1, 2023, the calculation of diluted net loss per share excludes the effect of 4,644 potential shares of common stock relating to awards of stock options that, if exercised, would have been antidilutive.

Note 8. Stock-based Compensation

Stock-based Compensation

Stock-based compensation expense for the thirteen weeks ended March 30, 2024 and April 1, 2023 was $19.1 million and $0.9 million, respectively.

Time-based options

Stock option awards containing only a service condition (“time-based options”) generally vest in equal annual installments over five years from the date of grant, provided the participant continues to be employed by, or provide service to, the Company through each vesting date.

The following table summarizes the activity related to time-based options as of March 30, 2024:

Performance-based options

Stock option awards containing a performance condition (“performance-based options”) vest in 25% increments as performance conditions are achieved through the term of the options. Twenty-five percent of the outstanding performance-based options vested upon completion of the Company's IPO, with the remainder scheduled to vest in equal increments over three years starting on June 30, 2024, provided market-specific conditions are achieved. Performance-based options are subject to continued employment through the vesting date.

Upon completion of our IPO on July 3, 2023, we commenced recognition of stock-based compensation for our performance-based options as the underlying performance-based condition was satisfied. During the thirteen weeks ended March 30, 2024, we recognized $16.8 million of expense related to amortization of the remaining outstanding performance-based options that are recognized on a graded vesting basis over their expected vesting period.

The following table summarizes the activity related to performance-based options as of March 30, 2024:

Restricted Stock Units

Restricted stock units (“RSUs”) containing only a service condition generally vest in equal annual installments over aone-year orthree-year period from the date of grant, provided the participant continues to be employed by, or provides service to, the Company through each vesting date.

The following table summarizes the activity related to RSUs as of March 30, 2024:

Note 9. Income Taxes

The income tax provision for interim periods is generally determined using an estimate of the Company’s annual effective tax rate adjusted for discrete items. Each quarter the estimate of the annual effective tax rate is updated, and if the Company’s estimated tax rate changes, a cumulative adjustment is made.

The effective tax rate for the thirteen weeks ended March 30, 2024 and April 1, 2023 was 90.6% and 25.2%, respectively. The effective tax rates differed from the federal statutory rate primarily due to changes in the valuation allowances, tax credits, withholding taxes, state income taxes, Global Intangible Low Taxed Income (“GILTI”), Foreign Derived Intangible Income (“FDII”), Internal Revenue Code Section 162(m) excess compensation, excess tax benefits related to stock option exercises and foreign rate differential.

In the normal course of business, the Company is required to make estimated tax payments throughout the year based on the expected tax liability for the full year. This results in a prepaid balance during the first half of the year, as the Company earns most of its profit in the second half of the year. As of March 30, 2024, the Company had an $11.1 million balance in prepaid income taxes, which is classified in prepaid expenses and other current assets in the unaudited interim condensed consolidated balance sheets.

Note 10. Commitments and Contingencies

Litigation and regulatory matters

The Company is involved from time to time in claims, proceedings and litigation arising in the ordinary course of business. The Company has made accruals with respect to these matters, where appropriate, which are reflected in the unaudited interim condensed consolidated financial statements. For some matters, the amount of liability is not probable or the amount cannot be reasonably estimated and therefore accruals have not been made. The Company may enter into discussions regarding settlement of these matters and may enter into settlement agreements, if in the best interest of the Company. From time to time, the Company is involved in routine litigation that arises in the ordinary course of business. There are no pending significant legal proceedings to which the Company is a party for which management believes the ultimate outcome would have a material adverse effect on the Company’s financial position.

Note 11. Subsequent Events

Acquisition of Thrift Store Chain

On May 6, 2024, the Company acquired, for an immaterial amount, 2 Peaches Group, LLC, 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. For the period of May 7, 2024 to December 28, 2024, the acquisition is expected to generate approximately $7 million in net sales.