Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q2 2023 Earnings Call Transcript

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q2 2023 Earnings Call Transcript August 31, 2023

Ollie’s Bargain Outlet Holdings, Inc. beats earnings expectations. Reported EPS is $0.67, expectations were $0.61.

Operator: Good morning, and welcome to Ollie’s Bargain Outlet’s conference call to discuss financial results for the second quarter of fiscal 2023. [Operator Instructions] Please be advised that this call is being recorded, and reproduction of this call, in whole or in part, is not permitted without express written authorization of Ollie’s. Joining us on today’s call from Ollie’s management are John Swygert, President and Chief Executive Officer; Eric van der Valk, Executive Vice President and Chief Operating Officer; and Rob Helm, Senior Vice President and Chief Financial Officer. Certain comments made today may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.

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Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our fiscal 2022 Form 10-K and fiscal 2023 periodic reports filed with the SEC and the earnings press release. Forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these statements. On today’s call, the company will be also referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings press release. With that, I will turn the call over to Mr. Swygert.

Please go ahead, sir.

John Swygert: Thanks, Jonathan. Thank you, and good morning, everyone. We appreciate you joining our call today. We had a strong quarter and are pleased with the positive trends in our business. Our second quarter results were ahead of our expectations, driven by strong comparable store sales and margin expansion. In the quarter, comparable store sales increased 7.9%, and our adjusted EBITDA margin more than doubled to 12.4%. This marks our fifth consecutive quarter of positive comp store sales. Given our better-than-expected performance in the second quarter and continued momentum in our business, we are raising our full year sales and earnings guidance. Our sales strength in the second quarter was broad-based, with almost 70% of our categories comping positive.

Our best performing categories included food, summer furniture, candy, lawn and garden and housewares. Not surprisingly, some of our softer categories were hardware, room air and furniture. While record temperatures in July were favorable for air conditioner sales, it was not enough to offset weaker sales from cooler temperatures during the first two months of the quarter. Our recipe for success has always been selling Good Stuff Cheap and delivering our customers extreme values every time they step foot into one of our stores. Today, shoppers are more savvy than ever, and they are looking for great deals on brand name merchandise. The consumer is more focused today on stretching their budgets and making most of their hard-earned dollars. Ollie’s has been in the business of saving people money for more than 40 years.

We sell brand-name products at drastically reduced prices, with savings between 20% to 70% compared to traditional retailers. Customers know they can find real brands and real bargains on products they need and use in their lives each and every day. Suppliers know we are a trusted partner for managing excess inventory and closeouts. Our continued growth in many years of closeout experience are leading to stronger buying relationships and better access to deals. We are seeing a growing availability of deals from both new and existing vendors. While the pandemic resulted in challenges in supply chains, increased shipping costs and created labor disruptions, the environment has become more normalized today. Manufacturers are, once again, creating new and innovative products, changing packaging sizes, and retailers are reducing inventory levels to account for changing consumer demand.

This is made for a very strong closeout environment. Outside of the deals, we have made investments in our people, supply chain and realign some of our marketing efforts, all of which are driving better execution across the organization, providing our customers an even more exciting shopping experience. Eric will speak to these in a moment, all of which are driving our strong performance. And we feel very good about our ability to return to our long-term algo of double-digit sales growth, 40% gross margin and double-digit EBITDA growth Now let me pass the call over to Eric to discuss our store growth and operating initiatives.

Eric van der Valk: Thanks, John, and good morning, everyone. We opened six stores during the quarter, ending with 482 stores in 29 states. Quarter-to-date, we have opened an additional 10 stores, bringing us to a store count of 492. We are tracking to our 45 new store target this year despite the continued challenges in real estate and construction. We are also making progress in our remodel program, completing seven stores during the quarter, bringing us to 14 stores to-date, and we are on pace to achieve our plan of completing 30 to 40 remodels this year. Our customers deserve an updated shopping experience, which showcases our tremendous value, and we are committed to the remodel program going forward. John touched on the strength of our deal flow, and we are equally focused on driving productivity improvements throughout the organization.

We are continuously making process improvements to help manage costs and improve our margins over the long term. Running a closeout business is unlike any other traditional retail business. This model is full of inconveniences and challenges, and we are built for it. Our extensive buying and closeout operating experience is a strategic differentiator for us. On the marketing front, we updated the format of our print ads earlier this year. We transitioned from our primary format of an 8-page flyer to a more streamlined version. We believe many customers were only focused on the front and back pages of the flyer. This new format allows us to showcase our very best deals and communicate a stronger call to action. Our narrower assortment in the flyer also simplifies execution.

It makes us more nimble across many areas of our business, including buying supply chain and store operations. It is also a better customer experience as key ad product features are more prominent in our stores and, therefore, easier for customers and associates to locate. We also launched a new visual design of our ads a few weeks ago. The new creative is designed to make it easier and faster for customers to see and respond to our great deals, extreme values and unique shopping experience. We continue to broaden our reach through alternative forms of marketing, such as digital media, social influencers and even our first broadcast media tour, featuring Limor Suss, a well-known consumer correspondent who provided content that was carried on TV, radio and online.

The video segment ran in over a dozen major markets and generated a significant number of impressions. Turning to supply chain. We recently completed the expansion of our Pennsylvania distribution center, which enable us to service an additional 50 to 75 stores. We are also in the process of building our fourth distribution center in Illinois, which is expected to open in fiscal 2024. This will provide us the capacity to service an additional 150 to 175 stores, supporting the next leg of our new store growth in the Midwest. These investments will enable us to service between 700 and 750 stores from our distribution network in support of our long-term target of 1,050 stores or more. The strong deal flow, along with improvements we are making in marketing, stores and supply chain, position us well for profitable growth as we continue to scale our business Before I turn it over to Rob, I would like to thank our entire Ollie’s team.

It takes each and every one of us to make this business a success. We have the most talented and hardest working people in this business, who are passionately committed to winning day in and day out. We appreciate all you do. Rob?

Rob Helm: Thanks, Eric, and good morning, everyone. We are pleased with our strong performance in the quarter and continued momentum in our business. Our results came in ahead of our expectations, driven by better-than-expected comps and solid margin expansion. Based on our strong performance and continued momentum, we are raising our sales and earnings guidance for the full year. For the quarter, net sales increased 13.7% to $515 million, driven by a 7.9% increase in comparable store sales and new store unit growth. Our comp store sales growth was driven primarily by transactions. Ollie’s Army increased 4.1% to 13.5 million members, representing over 80% of our sales. During the quarter, we opened six new stores, ending with 482 stores in 29 states.

We are pleased with the first half performance of our new stores. While early, as a group, these stores have performed above plan to date. Gross margin improved 650 basis points to 38.2%, in line with our expectations, driven primarily by favorable supply chain costs as well as higher merchandise margins. SG&A expenses as a percentage of net sales was flat to last year at 26.2%. As a reminder, we did not accrue for incentive compensation expense a year ago based on performance versus plan. Excluding incentive compensation expense, we levered SG&A by approximately 40 basis points. Operating income increased 218% to $53 million and operating margin increased 650 basis points to 10.2% in the quarter. Adjusted net income increased 205% to $42 million and adjusted earnings per share was $0.67 compared to $0.22 last year.

Adjusted EBITDA increased 147% to $64 million and adjusted EBITDA margin increased 670 basis points to 12.4% for the quarter. Turning to the balance sheet. Our cash position remains strong, with $310 million between cash on hand and short-term investments and no outstanding borrowings under our revolving credit facility at quarter end. Inventories increased 1% to $498 million, primarily driven by new store growth, partially offset by the benefit of lower capitalized freight costs and normalization of lead times on our in-transit inventory. Adjusting for these items, our inventory increased 5%. Capital expenditures totaled $26 million in the quarter and were primarily for the development of new stores, the remodeling of existing stores, the completion of our Pennsylvania distribution center expansion and the construction of our new distribution center in Illinois.

During the quarter, we bought back 277,000 shares of our common stock for a total of $17 million. At the end of the quarter, we had $109 million remaining on our current share repurchase authorization. We are committed to returning capital to our investors through share repurchases, while balancing our strategic growth opportunities and working capital needs. Turning to our outlook for the full year. Given our strong first half performance and continued positive trends in our business, we are raising both our sales and earnings outlook for fiscal 2023. For the full year, which includes a 53rd week, we now expect total net sales of $2.076 billion to $2.091 billion, comparable store sales growth of 4% to 4.5%. The opening of 45 new stores left one closure; gross margin in the range of 39.1% to 39.3%; operating income of $212 million to $219 million; adjusted net income of $165 million to $170 million and adjusted net income per diluted share of $2.65 to $2.74; an annual effective tax rate of 25.1%, which excludes the tax benefits related to stock-based compensation; diluted weighted average shares outstanding of approximately 62 million; and capital expenditures of approximately $125 million, including $75 million for the construction of our fourth distribution center and the expansion of our Pennsylvania distribution center.

Lastly, let me provide some commentary on our expectations in terms of the quarterly flow for the balance of the year. Based on the underlying trends in our business, we are confident in raising our third quarter comparable store sales expectation from flat to a positive 2% to 3%. This includes one less advertising flyer in the quarter, which shifts out of the third quarter and into the fourth quarter. We estimate the ad shift could negatively impact our third quarter comp store sales by approximately one full percentage point. With the ever-changing nature of our product assortment, we are leaving our comp store sales expectation for Q4 unchanged for now, with comps expected slightly higher than our long-term algo of 1% to 2%. Looking at new store openings, we expect to open approximately 23 new stores in the third quarter, which will result in a significant step-up in preopening expense.

We have opened 10 stores so far in the third quarter. Finally, our gross margin expectations for the back half are unchanged. Gross margin will follow a more normal seasonal pattern this year, which calls for slightly higher gross margin in the third quarter and slightly lower gross margin in the fourth quarter. We expect much more modest year-over-year gross margin expansion for Q3 and Q4 compared to the first half as we lap more normalized supply chain costs in the back half of last year Now let me turn the call back over to John.

John Swygert: Thanks, Rob. In closing, I would like to thank the entire Ollie’s team for everything they do. We operate a very unique business that requires dedicated team members who work extremely hard to make Ollie’s a special place for everyone. Our teams are doing an incredible job buying deals, assisting our customers and keeping our stores well stocked and merchandised. Everyone has a partner success, and we are grateful to our family of more than 11,000 team members. As we say, we are Ollie’s. That concludes our prepared remarks, and we are now happy to take your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Brad Thomas from KeyBanc. Your question, please.

BradThomas: Hi, good morning. And congratulations on the strong second quarter here.

John Swygert: Thanks Brad.

BradThomas: Thanks John. I wanted to just talk a little bit more about the closeout availability and the momentum you have as you go into the back half of the year. As we think back to 2022, of course, you all had some record buys that you were announcing as being some of the most exciting in the company’s history. Can you just help us think about not only the momentum and what you’re seeing out there right now versus how comparisons sort of factor into how you’re thinking about the back half?

John Swygert: Sure, Brad. Obviously, we’ve been doing this a long time. We’ve been buying deals for over 40 years, and that’s what we do. Deal flow is always pretty strong for Ollie’s based on our relationships and what we’ve been able to develop over the years. We do have – we always say we have deals all the time, and sometimes deals are hard to annualize year-over-year and quarter by quarter. But the flow that we’re seeing and have seen thus far this year has been extremely positive. Last year, we had the fancy store deal that came out in Q3 and into Q4. We obviously know – we have a pretty good idea where we’re sitting right now for the third quarter in the deal flow we’ve seen, and we’re pretty comfortable to go up against that deal that we had last year.

And obviously, you know it’s not standard for us to raise numbers above our long-term algo of one to two, and we’re going out with a two to three with an ad shift, taking out about a full percentage point out of the quarter. we have the momentum in the business that makes us feel pretty comfortable where we’re sitting today, and the deals are coming. And they’re broad-based, Brad. We’re seeing it everywhere. So we’re in a good position.

BradThomas: That’s really exciting. And if I can ask a follow-up on the margin outlook. Rob, I believe you reiterated the gross margin outlook for the back half. I guess just as we start to think about 2024, you’ve talked about getting back to that 40% gross margin. In broad strokes, John, Eric, Rob, maybe you could talk a little bit about how you’re thinking about the margin outlook for next year?

Rob Helm: I’ll take that one. It’s Rob. So yes, we reiterated the guidance of 39.1% to 39.3%. When you think about the year, the first half certainly was burdened by a higher rate of supply chain cost in the second half will be. So when we get to Q4 of this year, we believe that we’ll be very close to our long-term algo of 40. And believe that for next year and during the year, we’ll be positioned to be on algo for ’24.

BradThomas: Great. Thank you very much.

John Swygert: Thanks Brad.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Peter Keith from Piper Sandler. Your question, please.

Peter Keith: Hi, good morning, everyone. I’ll give my congratulations on a great quarter as well. So John, you’re talking about the business kind of returning to algo over time. I guess on the heels of this, this is such a spectacular comp quarter. It’s hard to predict next year, but how do you think about returning to algo in ’24 just kind of lapping this type of environment? Do you think that’s possible or too hard to predict?

John Swygert: Yes. Peter, I feel pretty good about being able to return to our long-term algo in 2024. The – obviously, this is what we do. The deals are going to be there next year as well. And as long as we execute, we actually consistently, I think we’ll be able to comp the comp. I think the long-term algo of one to two is appropriate from a comp store sales perspective. And then double-digit sales and EBITDA growth, I think are built into how we plan to grow the model. So I feel pretty comfortable where we’re sitting today going to 2024 that we can execute.

Peter Keith: Okay. Great. And my follow-up then is just kind of – I’m trying to parse out the backdrop versus the execution improvement. I know it’s probably really hard to do, but I guess focusing specifically on how you’ve condensed the flyers, I think that’s an interesting change. Is there any way to quantify or think about, maybe just anecdotally, that driving any sales benefits that perhaps have some sustainability?

John Swygert: I think that’s very, very, very hard to parse that out and be able to break down and quantify the difference of the items and what we’re trying to do here. So I do believe that it is a positive. It does have a positive impact, but I don’t — I’m not able to break that out for you.

Eric van der Valk: Peter, it’s Eric. I would answer the question. It’s 100% execution. I’m just kidding. I’m joking. The flyer change, we did test the flyer change. We ran two pretty robust tests to the flyer change, and we saw really no difference between the formats. We think, ultimately, long term, this format is more compelling. When we show our customers our great deals, it drives excitement traffic or absolute best deals shown in this flyer are doing that. And certainly, our results to date have proven that. We’ve been at this now for two quarters, and we’re very happy with the results.

Peter Keith: Okay. Sounds good, guys. Thanks so much and good luck.

John Swygert: Thank you.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Edward Kelly from Wells Fargo. Your question, please.

Edward Kelly: Hi, guys. Good morning. You could talk a little bit more about the deal pipeline. I saw in your most recent flyer, it looks like I had that big Coleman buyout. Just kind of curious as to how you’re teed up sort of like into the back half of the year and visibility on the holiday? And then as part of this question, there, I think, has been concern from investors that in ’24, you’ll sort of lack this, right, like more normalized deal environment that is for you, right, like you talk about continued deal flow, but it’s been very good. Any thoughts on like a stronger for longer buying cycle related to what we’re seeing at retail and the opportunity there even into next year?