Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q3 2022 Earnings Call Transcript

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q3 2022 Earnings Call Transcript December 7, 2022

Operator: Good morning, welcome to Ollie’s Bargain Outlet Conference Call to discuss the Financial Results for the Third Quarter Fiscal Year 2022. Currently all participants are in a listen-only mode. Later we will conduct a question-and-answer session and interactive instructions will follow at that time. Please be advised this call is being recorded and the reproduction of this call in whole or in part is not permitted without expressed written authorization of Ollie’s. Joining us on the call today from Ollie’s management are John Swygert, Chief Executive Officer and Interim Chief Financial Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer; and Rob Helm, Senior Vice President, Chief Financial Officer. I will now turn the conference call over to your host, Lyn Walther with ICR. Please go ahead.

Lyn Walther: Thank you. Good morning, and welcome to Ollie’s third quarter conference call. A press release covering the company’s financial results was issued this morning and a copy of that press release can be found in the Investor Relations section on the company’s website. I want to remind everyone that management’s remarks on this call may contain forward-looking statements, including, but are not limited to, predictions, expectations or estimates and the actual results could differe materially from these mentioned on today’s call. Any such items, including with respect to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events.

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Factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q, as well as our earnings release issued earlier today for a more detailed discription of these factors. We will be referring to certain non-GAAP financial measures on today’s call, that we believe may be important for investors to assess our operating performance. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release. And with that, I will turn the call over to John.

John Swygert: Thanks, Lynn, and hello, everyone. Thank you for joining our call today. Before we begin, I would like to welcome Rob Helm, our new Chief Financial Officer to the Ollie’s family. Rob has a strong track record in the consumer retail sector and I am confident his ability to be a valued contributor to Ollie’s and look forward to working with him for many years. Our third quarter total sales increased 9% over last year and comparable store sales increased 1.9%. While we were pleased with our overall sales results for the quarter, we were tracking to the low end of our comp guidance until we experienced softness in business during the last two weeks of October. During the quarter, more than half of our departments generated positive comparable store sales.

We saw particular strength in lawn & garden, hardware, food, health & beauty aids and sporting goods. We were pleased with the significant improvement in our gross margin rate, compared to last quarter. This was driven by lower supply chain costs and improved merchandise margin. We continue to invest in price to motivate consumers as the competitive environment is highly promotional. As consumers need to save on everyday essentials, we are seeing continued strength in our consumable categories. We believe we are well positioned to thrive in the current environment and we have tremendous deals in our stores and in the pipeline. The closeout market remains extremely favorable with deals, deals and more deals. We are seeing incredible opportunities across all of our categories and the availability of deals continue to grow from both new and existing vendors.

At this point, we see no slowdown in sight, we sell good stuff cheap and this type of environment allows us to emphasize our compelling value proposition to consumers. Moving to real estate, we had a busy quarter opening 15 new stores and closing one due to a relocation, which reopened early in the fourth quarter. We ended the quarter with 463 stores in 29 states, compared to 426 last year. While store opening challenges persist, we have opened 39 stores as of today, bringing us to a store count of 467 with one additional store opening plan in January. We remain pleased with the productivity levels of our new stores overall. New stores are the engine for our sales growth. We continue to face challenges in the market today with permitting and construction and as a result, we expect to open approximately 45 stores in 2023, our long-term plan is to open between 50 stores and 55 stores annually and are confident that our model can support over 1,050 stores in total.

In terms of remodels, we are pleased with the results of our store remodel program. We have tested several different layouts and continue to learn what works best for our customers. We have remodeled 15 stores so far this year and plan to complete between five to 10 more by the end of the fiscal year for a total of 20 stores to 25 stores. Turning to our supply chain, we are well positioned to benefit from the improvements we have made to our supply chain over the past year. The environment is more favorable as pressure on transportation continues to ease, compared to last year in the first half of 2022. We’re in a strong position to service our stores during the peak holiday selling season. To support our new store growth, we are finalizing plans to open our fourth distribution center in the Midwest and have agreed to purchase land in Princeton, Illinois.

Together with the expansion of our York, Pennsylvania distribution center next year, our distribution center network will be able to support over 700 stores. We expect to complete the expansion of our York distribution center in the first half of 2023 and the fourth distribution center by the end of the second quarter of 2024. On the marketing front, we have made progress on enhancing brand awareness to attract new customers and motivate existing customers. As part of our 40th anniversary celebration, we unveiled a 16 foot seven inche bobblehead of our Mascot Ollie, which won the Guinness World Record for the world’s largest bobblehead. This event created a lot of buzz for our brand and generated over 1,200 news mentions through our online, TV and newspaper outlets.

Our 40th birthday events, including our America’s biggest cheap skate contest, combined with our enormous bobblehead led to over 1 billion impressions of our brand. We invite you to visit the Ollie’s bobblehead and display at our Harrisburg, Pennsylvania store. We are excited by the results we are seeing from our social media strategy to test micro and nano influencers on platforms such as TikTok, Facebook and Instagram, which will begin in the second quarter. We will continue to invest in and build on all forms of digital marketing. Ollie’s Army continues to perform very well and accounted for over 80% of our sales and grew 5.2% during the quarter. Our busiest and most exciting night of the year Ollie’s Army Night is this Sunday, December 11.

We are thrilled once again to open our doors exclusively to Ollie’s Army members. Our teams have worked tirelessly to fill our stores with tremendous deals for this special night and we can’t wait to welcome our loyal bargainauts. Come join us for a great evening of fun and bargains. If you’re not on the — if you’re not on Ollie’s, I remember, there’s still time to enlist in sharing the fun and special savings. We hope to see you there. Our civilian database, which was — which is comprised of non-Ollie’s Army shoppers also continues to grow. In October, we began testing targeted direct mailings to these customers as part of our efforts to expand our customer base. We are encouraged with the progress we made during the third quarter, we recognize that consumers are facing significant inflationary pressures and remain focused on what we can control, which is delivering great deals to our customers.

Although the environment remains uncertain, we were pleased with our Black Friday sales as customers responded favorably to our in-store deals. Our quarter-to-date comp store sales trends are running in line with our updated guidance. We have a lot of business still in front of us and believe we are in great inventory position to finish the season strong. In closing, we are a high growth company in one of the most attractive sectors in retail, extreme value and we believe we have the scale, the know-how and the relationships to benefit from the continued disruption in the marketplace. We have tremendous runway to expand our footprint and we believe the value proposition of our business model supports our long-term growth plans. I’ll now turn the call over to Rob to take you through our financial results and Q4 outlook in more detail.

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Rob Helm: Thanks, John. And good morning, everyone. I’d like to start off by thanking John and Eric and the rest of the team at Ollie’s for the warm welcome. While I’ve only been here for a few weeks, I’ve been really impressed with the caliber of our team and the dedication of our associates. For the third quarter, net sales totaled $418 million, an increase of 9% from the prior year. Comparable store sales increased 1.9% in the quarter compared to last year. During the quarter, we opened 15 new stores and closed one store, ending the quarter with 463 stores in 29 states, an 8.7% increase in store count year-over-year. Since the end of the third quarter, we’ve opened an additional four stores. Gross profit margin declined 40 basis points to 39.4% compared to 39.8% in Q3 last year due to higher supply chain costs and slightly lower merchandise margin.

We were pleased with our significant gross margin improvement from the second quarter, primarily driven by lower supply chain costs, which were meaningfully lower than the first half of the year. We also benefited from a higher merchandise margin compared to the second quarter. SG&A expenses as a percentage of net sales increased to 29.9%, compared to 29.7% in the prior year. The 20 basis point increase was primarily due to the deleverage of our fixed expenses related to higher selling costs, partially offset by our disciplined expense control. Operating income totaled $30 million for the quarter, flat to last year. Operating margin decreased 80 basis points to 7.1% due to higher supply chain costs, a slightly lower merchandise margin and higher selling costs.

Adjusted net income was $23 million and adjusted earnings per share was $0.37, compared to $0.34 last year. Adjusted EBITDA was $39 million, and adjusted EBITDA margin decreased 50 basis points to 9.4% for the quarter. Inventories increased 11% to $524 million in the quarter compared with $472 million a year ago, primarily due to the increased number of stores, the timing of merchandise receipts and higher supply chain costs. In addition, it is important to note that our inventories at the end of Q3 2021 were lower than our historical level due to the supply chain disruption. Our balance sheet cash remains strong with $182 million in cash on hand and no outstanding borrowings under our revolving credit facility. Capital expenditures totaled $15 million primarily for new and existing stores and the expansion of the York distribution center.

This compares with $12 million in the prior year. During the quarter, we invested $20 million has purchased shares of our common stock. Moving on to our outlook for the fourth quarter. We have a lot of business ahead of us, including Ollie’s Army Night and believe we are well positioned to deliver great deals to our customers. However, given the uncertainty and unpredictability of the current environment, we are adjusting our expectations for the fourth quarter. We now expect total net sales of $540 million to $550 million, comp store sales of flat to 2%. Gross margin rate in the range of 38.2% to 38.4%, operating income of $66 million to $70 million, adjusted net income of $49 million to $52 million and adjusted earnings per share of $0.78 to $0.83, both of which exclude excess tax benefits related to stock-based compensation.

For the full-year, we now expect total net sales of $1.817 billion to $1.827 billion, comp store sales of negative 3.8% to negative 3.3%, the opening of 40 new stores, less two relocations and one closure. Full-year gross margin of approximately 36.1% to 36.2%, operating income of $129.5 million to $133.5 million, adjusted net income of $98.8 million to $101.8 million and adjusted earnings per share of $1.57 to $1.62, both of which exclude excess tax benefits related to stock-based compensation. An annual effective tax rate of 24% and which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately $63 million. We expect capital expenditures in the range of $55 million related to new stores, our York distribution center expansion, costs related to our fourth distribution center, store level initiatives and IT projects.

I will now turn the call over to the operator to take your questions.

Q&A Session

Operator: Thank you. Our first question comes from Brad Thomas with KeyBanc Capital Markets. Your line is open.

Taylor Zick: Hi. This is Taylor Zick on for Brad Thomas. I appreciate you taking the question. I was wondering if you could talk a little bit more about the cadence of the sales during the quarter? And then if you can talk anymore about the — how the holiday is shaping up more specifically? Thanks.

John Swygert: Sure. With regards to the overall cadence of the quarter, as I said initially, our trends are running really, really strong and at the low-end of our guidance until the end of the 11th week of the 13 week quarter. We had some slowdown in business mainly related to warmer weather and obviously we’re locked and loaded for the cold weather at this point in time and that did not come out in the Q3 perspective. But obviously, looking at the overall the quarter was actually August and September were pretty much in line with each other and October was definitely the drag on the overall quarter. And as we said, we’re liking the way the fourth quarter is shaping up. We had a strong Black Friday day and a Black Friday weekend and we continue to see some nice trends in the business. So we’re obviously pretty comfortable where we’re sitting today and we feel good with the business.

Taylor Zick: Got it. Thank you. If I could just squeeze one more in, can you talk about how the toy and maybe the seasonal or maybe just generally how the discretionary items are performing versus the more stable items?

John Swygert: Yes. Obviously, there’s just a couple of questions there, toys is a seasonal item, as well as holiday. So and then we have a ton more discretionary items within our stores. Discretionary is performing well, as you can note in our top selling departments lawn & garden and hardware are definitely under discretionary front those were our top two departments in the quarter. So we’re definitely seeing some pressure on some discretionary items that are higher ticket, but we believe the value proposition we’re providing is pretty strong and the consumers are responding as well with what we’re offering. With regards to toys, obviously, last year was a little unique to where there’s a lot of supply chain disruptions. People were worried that there was going to be a shortage of holiday goods.

So we believe the toy sales were pulled forward a little bit into Q3 last year. So it was made a little bit of a tougher Q3 for us. There’s still 17 shopping days to go for the rest of the holiday period. We’re in very good shape with toys and we feel like we’re in the season pretty strong.

Taylor Zick: Thank you. Best of luck.

John Swygert: Thank you.

Operator: Our next question comes from Peter Keith with Piper Sandler. Your line is open.

Matt Edgar: Hi. This is Matt Edgar on for Peter. Thanks for taking our questions. Just real quickly, how is the closeout backdrop, kind of, changing sequentially? I know you mentioned that you’re getting more and more closeouts, but just how is it changing and then how is the margin on those closeouts changing? Appreciate it.

John Swygert: Yes, the overall closeout business has been strong. I will tell you it is getting stronger, the deals are getting bigger and we’re seeing some positive movement there. As we had expected, I don’t think this is a surprise to us we had — obviously, we can’t call out the timing of deals, but we are seeing some nice flow in some categories that we’re excited about. We’re seeing good activity in the flooring department, automotive, believe it or not lawn & garden, domestics and housewares are our biggest contributors right now to the deal flow. Closeout margin profile is pretty consistent year-over-year. We feel real good with where we’re sitting on the margin profile of the deals. We think we’re going to continue to see momentum in the business as we move forward here.

Matt Edgar: Great. That’s good to hear. And then I guess maybe you just answered this on you can’t really talk to timing, but how long do you think this elevated closeout environment can last?

John Swygert: We never know that answer to be honest with you. Closeouts have been pretty good for 40-years. So I would tell you the closeout business is pretty strong, I think the — what we’re seeing today and the overall inventory challenges that people are facing and a lot of goods that are sitting in the warehouses. I would tell you, I think we have pretty good runway through at least the first half of €˜23 through €˜23.

Matt Edgar: Great. Thanks. I’ll hop off.

John Swygert: Thank you.

Operator: Our next question comes from Jason Haas with Bank of America. Your line is open.

Jason Haas: Hey, good morning and thanks for taking my questions. I’m curious if you’re seeing anything — hey John, I’m curious if you’re seeing anything this year that changes your philosophy around the long term algo for the business? I think in the past we’ve talked about 1% to 2% annual comps and 39% to 40% gross margin. I understand there’s some things that can swing that gross margin around. But I’m curious if just given there’s been some volatility this year understandable given the environment we’re in, but any changes here to the long-term algo?

John Swygert: Yes, I think Jason, the answer on that would be, I don’t think the answer is no. I would tell you, I’m pretty excited about 2023 coming up, because I think we’re getting back to more normalized cadence and more normalized business model and people can get their lives back to normal. So, which I think will bode well for us and everyone else in the business. I don’t think that the long-term algo has changed at all. I’ll call it choppiness in 2023 for us to get back to our normal algo margin may be a little bit lower on ’23 than I’d like to be, but I think we’ll get there by ’24. As we said, the store growth, I’d like to be a 50 to 55, just with the permitting and construction challenges, I think ’23 will be, call it 45 stores. So we’ll have a little bit of slowness in ’23 with regards to long-term algo, but I think we are right back to it and that’s intact.