Lorraine Hutchinson: Kristin, in November, you had mentioned that you expect CapEx to be elevated over the next few years. Can you walk us through the uses on capital spend in 2024?
Kristin Wolfe: Our CapEx plan for 2024 is $750 million, which is about 7% of sales. And most of that investment is in our stores and supply chain as we’re stepping up investments to support accelerated new store growth, as well as the expansion of our distribution center network to support our larger store base. Let me provide a little bit more color on these two main drivers. So starting with stores, as Michael mentioned, we’re planning to open 100 net new stores, close or relocate about 40 stores. So that’s approximately 140 gross new stores. This is well above the level we’ve opened the last few years and actually the highest number of stores we’ve opened in our history in a year. Our store CapEx represents about 45% of the CapEx spend in 2024.
Secondly, on supply chain, supply chain CapEx is about 30% of our CapEx spend. The big driver of our CapEx spend in supply chain is the material handling equipment that will go into our state-of-the-art 2 million square foot DC opening in the southeast in 2026. That’s about twice the size of our next largest DC and will be designed and built for our off-price business, be highly automated and more productive than any DC in our current network. These incremental investments in new stores and supply chain capacity are really what’s driving the step up in CapEx this year and in the next few years.
Operator: [Operator Instructions]. Your first question comes from the line of John Kernan from TD Cowen.
John Kernan: Kristin, it’s encouraging freight and supply chain are now sources of margin improvement. They’ve been a source of pressure the past few years. Are you making faster progress here than you expected on those two line items? How do we think about the potential improvement on freight and supply chain in your 2024 guidance? And just what’s the long-term. magnitude of the margin amount here.
Kristin Wolfe: I’ll take you through these separately starting with freight. In fiscal 2023, freight leveraged 90 basis points. Those savings were driven by lower freight rates, but also specific transportation initiatives we have to optimize our outbound and inbound processes. We still expect freight to be a contributor to our margin expansion in fiscal 2024 as we anniversary lower freight rates in the first part of the year and we continue to drive efficiencies across transportation. There has been some limited pressure on ocean freight on certain routes, but we do not see significant risk to our ocean freight and that’s embedded in our merchandise margin. Domestic freight represents a significant majority of our freight expense and we continue to see some opportunity to bring that expense lower as we plan.
On supply chain, in the fourth quarter, I think I mentioned, supply chain cost leveraged 40 basis points compared to last year. And the efficiency initiatives that drove that that we previously discussed to reduce labor hours and processing reserve to more efficiently manage the flow of goods and minimize number of touches across distribution center, that’s really what’s driving this deleverage recapture. In 2024, we are assuming continued modest improvement on supply chain costs as a percentage of sales, driven by those initiatives I just mentioned, but also other specific productivity initiatives we’re working on. We are planning supply chain leverage as a contributor to the 50 basis points of operating margin expansion at the high end of our margin guidance for 2024.
So those are the shorter term objectives. Longer term, while we haven’t specifically built this into the five year model we’ve laid out, we are building out much larger, more automated, more productive new distribution centers to accommodate our growth. Over time, we’ll move an increasing percentage of our merchandise through these more efficient DCs that are designed for off price. And in the long term, this could drive even more leverage on supply chain expense.
John Kernan: Maybe a follow-up for David. You increased the share buyback this quarter, $100 million, but the business generated nearly $400 million in free cash flow in fiscal 2023. How should we model the buyback on a quarterly basis and annual basis going forward?
Michael O’Sullivan: We did, in fact, increase our buybacks to a little over $100 million last quarter, which was nearly double the previous quarter. So we were more opportunistic this past quarter, as we will from time to time, depending on valuation and liquidity. And we don’t guide to buybacks, but I think you can see, looking at our balance sheet at the end of the quarter, we had over $900 million in cash and over $1.6 billion in liquidity, so we’re in a really very strong liquidity position. As we’ve said many times before, our first priority is to invest in our growth. And Kristin just, a few questions ago, walked through our larger CapEx investment in 2024. Nevertheless, despite that step up, we still expect to generate sufficient cash flow, free cash flow to return excess cash to shareholders.
We’re going to continue to be active, but we’re not going to guide to a level. I guess what I would say is, if you look at the buyback level in fiscal 2023 for the year as a whole, that’s probably a reasonable proxy for what you might expect, again, depending on market conditions. I would also remind you that we had $500 million remaining at the end of Q4 on our buyback authorizations that run through August 2025. So we’ll update you in May on our Q1 buyback opportunities.
Operator: Your next question comes from the line of Brooke Roach from Goldman Sachs.
Brooke Roach: Michael, as you evaluate the better-than-expected comp result in 4Q, can you share a bit more color on the impact that you may have seen in the fourth quarter from weather or other factors?
