David Manthey: Okay. All right. And then looking long term, Melanie, you and Pete, you often talk about growing SG&A at a slower rate than revenues or assuming a flat gross margins or gross margin dollar growth. As you look forward from here, what are your expectations for growing SG&A kind of on a secular basis relative to sales growth or gross profit dollar growth?
Melanie Hart: Yes. So when you look at the guide for next year, you will see kind of that similar formula as what we’ve always consistently achieved over time. And so specifically, I kind of called out the three areas where we would expect those incremental investments as we move into 2024. As we get kind of out past that, we wouldn’t necessarily see those larger fluctuations in the performance-based compensation depending upon how many sales centers we open each year could indicate kind of what that expense burden is in any particular year. And at this point, we would expect that the – for kind of the near term, we would expect that those continuing dollars that we’re spending on IT would be part of the expense base as well.
David Manthey: But long term, it used to be like 60% and then it was a little bit higher than that SG&A growth relative to sales growth?
Melanie Hart: Yes. So it’s going to be higher than the 60% when you consider the technology investments.
David Manthey: Even beyond 2024?
Peter Arvan: Yes. As we said, Dave, we’re trying to invest in our capabilities, which will allow us to keep growing for many, many years to come. The technology platforms that we are investing in are real – they’re real differentiators for us, but they take investment. So we know that we’re going to spend ahead of the benefits on that. So early on, I would expect that if I looked at that ratio on technology, I’m going to spend more in the beginning that I’m going to get back, but I’m going to get that back in the outer years. And that’s really the way investing in technology cycles would work for us.
David Manthey: Okay, will follow up. Thank you.
Peter Arvan: Thank you.
Operator: The next question comes from Scott Schneeberger of Oppenheimer. Please go ahead.
Scott Schneeberger: Thanks very much and good morning.
Peter Arvan: Good morning.
Scott Schneeberger: I guess, Melanie, probably more for you than Peter. On weather, it sounds like in the guidance, you said maybe one or two percentage points benefit year-over-year. But then Peter had those comments at the beginning that California has actually started with tough weather this year. So it’s very unpredictable. But just want to get a sense of where – really how you’re looking at that versus last year and the opportunity to make up that ground. Thanks.
Melanie Hart: Yes. So the 1% to 2% weather recovery is really what we’re looking at within the high end. And so at the flat revenue base would be consideration of no weather recovery. So normally, when we guide, we’re kind of looking for normalized weather, but know that we do have the comps in first and second quarter, where we were impacted more significantly from weather for the year. So it’s really kind of within the range, but very hard to predict kind of quarter-over-quarter. We know what the historical impact will be. But as we look forward, the timing – if we get that recovery and when we get it, is a little bit out of our hands at this point.
Scott Schneeberger: Okay. Thanks for that. And then as a follow-up, inventory is down. I think it was 14% year-over-year in 2023. I believe you quantified it around $230 million. Is – and then I think your guidance was a bit of a challenge in the first quarter, but much lower levels in second, third and fourth. Do you still have room to reduce inventory overall by a lot? Did you get it all done in ’23? Or is there more opportunity with how you’re managing that? Thanks.
Melanie Hart: Yes. So for first quarter, actually, we’re very much on pace to what we would expect. The uptick in first quarter is really us to be prepared from a stocking level for the selling season. So – but we would see that the level of increase from the year-end to first quarter would be really kind of consistent with historical levels. And as we look across the network, we internally as part of our capacity creation initiatives, we do continually strive to reduce overall inventories at our kind of existing sales centers. And then the flip side to that is we also continue to bring in new products to those sales centers as well. So when you look at kind of our overall target by the end of this year, certainly from a days sales on hand standpoint, we would expect to see a couple of days improvement, and that would really be offset by the mix of additional SKUs that we’re carrying and in lower levels because of improved supply chain.
Peter Arvan: Our inventory management is one of those functions that is we treat like continuous improvement. We look at inventory at the individual sales center. We look at it at the market level. And we’re always looking for ways to be more efficient and making sure that we do the best job representing our supplier partners to take those new products to market. So I think last year, we demonstrated a tremendous ability to deliver on our commitments and manage inventory, and we’ll do that this year as well in line with what the volume activity is.
Scott Schneeberger: Great. Thank you.
Operator: The next question comes from David MacGregor of Longbow Research. Please go ahead.
David MacGregor: Good morning everyone. Pete, I want to go back and talk – I want to go back and pick up on the conversation around SG&A, if we could. And I guess I’m thinking back to a previous analyst meeting where you had expressed a fairly high level of confidence in your ability to hold 15% operating margins in a weak environment, just given the progress that you’ve made on a number of structural factors. And presumably, at that point, you taken into consideration whatever the investment requirements would be to achieve that. Now things seem to have changed and 13.5% last year, 13% this year. Where did you see the greatest divergence from those expectations? Is the level of investment necessary to achieve your goals just gone up fairly substantially from which you had envisioned at that point in time?
Peter Arvan: Well, I think we’ve added more things to the deck in terms of what our contribution is. I think the technology platforms that we are working on today, as I said, the way the cycles work as you – actually you invest ahead of those things. And if I go back a couple of years and I looked at what we were doing from a technology perspective and where we are today and where we’re investing money, the deck is actually very different. At the same time, as I mentioned in my comments, we are also relentlessly focused on our productivity initiatives across the branches, looking at all of our controllable expenses and also our capacity creation initiatives. But there’s a couple of things, too. If I look at the rent levels today versus what they were a couple of years ago, the rental rate renewals that we are seeing are significant.
If I look at the labor costs today that we are seeing as compared to a couple of years ago, they are significant. But I think the business is doing a very good job digesting those increases by continually focusing on capacity creation. But as I look at operating margin, it’s a longer view. So I don’t look at it and say, “Wow, I have to make sure that I get exactly to what we did last year or a little bit better this year because if I did that, then I would probably forego our ability to invest in longer-term programs.” Our view is that we’re going to be here for the long haul. We’re not going anywhere. We’re the biggest industry – or biggest company in this industry, which we believe has very good long-term growth characteristics. So when we invest, we invest for the long term.
So am I concerned that our level of spending this year is up? No, I’m not because I think if you look at where we’re investing that money and what the longer-term returns are for the business, I think it’s a very wise investment. And I think we would be shortsighted if we said, okay, we got to stick to that ratio every year because I think we would pigeonhole ourselves and inhibit our ability to grow over the long term.
David MacGregor: Right. And if you think about the returns that you’re anticipating on these investments, if you get back into an environment with 115,000 to 120,000 new pools, what’s achievable in terms of operating margins?
Peter Arvan: I think if you look at our history on operating margins, I mean, if new pool construction was back up to 120,000 units, all things considered, I think we could be back in close to the numbers that we saw at our peak. Obviously, a lot of variables to consider. But the structural fundamentals of the business are there, the company’s ability to execute and history of delivering on those things is there. So obviously, volume is our largest lever in terms of operating margin improvement. So if the volume comes back because new pool construction goes through the roof and renovation goes through the roof, then I would certainly expect our operating margins to expand at a rapid rate.
David MacGregor: Good. That is all I got. Thanks and good luck.
Peter Arvan: Thank you.
Operator: The next question comes from Trey Grooms from Stephens. Please go ahead.
Sid Ramesh: Good morning everyone. This is actually Sid Ramesh on for Trey. Thanks for taking my questions today. Sorry to go back to more SG&A, but could you give us some more color on what these investments are in the tech and their impact longer term?
Melanie Hart: Yes. So the investments in tech are largely the ones that Pete described. So it’s continuing to build out our POOL360 suite of service. It’s the water test as well as the service software. We’re definitely going to go into some more robust discussion on that at our upcoming Investor Day.
Sid Ramesh: Got it. And then as a follow-up, kind of switching gears, could you give us kind of an updated commentary on backlogs and what you’re seeing there in terms of new construction versus remodel?
Peter Arvan: Sure. Now just keep in mind that that’s the smallest part of our business. So the beginning of the year is always show season, right? So I have spoken to hundreds of customers over the last several weeks since the beginning of the year. I guess, Mike, the way I would describe their sentiment is, by and large, the group is very optimistic, but cautious. So I didn’t meet anybody that said it’s doom and gloom. I think your stronger dealers are getting stronger. I think some of the weaker dealers are feeling it worse than others. But if I look at the dealer base as a cohort for new pool construction and renovation and remodel, they’re optimistic but cautious. I don’t think anybody believes that there’s anything structural in the economy that is going to drive a huge resurgence in new pool demand until the monetary policy changes and access to affordable lending improves.
Sid Ramesh: Got it. Appreciate the color. Thanks a lot.
Operator: The next question comes from Andrew Carter from Stifel. Please go ahead.
