Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q3 2023 Earnings Call Transcript

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q3 2023 Earnings Call Transcript December 6, 2023

Ollie’s Bargain Outlet Holdings, Inc. beats earnings expectations. Reported EPS is $0.51, expectations were $0.45.

Operator: Good morning, and welcome to Ollie’s Bargain Outlet’s Conference Call to discuss financial results for the third quarter fiscal 2023. Currently, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and an interactive instruction will follow at that time. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie’s. Joining us 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.

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, dated March 24, 2023, and fiscal 2023 periodic reports on file 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 also be 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 said, I will now turn the call over to Mr. Swygert.

Please go ahead, sir.

John Swygert: Thank you, and good morning everyone. We appreciate you joining our call today. We had another strong quarter and are pleased with the positive trends in our business. Our third quarter sales and margins came in ahead of our expectations, driven by strong deal flow, lower supply chain cost and continued execution throughout the organization. In the quarter, comparable store sales increased 7%, net sales increased 14.8% to $480 million and adjusted EBITDA increased 29.5% to $51 million. We also opened a record 23 new stores in the quarter and saw a very healthy new store productivity in the period. Based on the strength of our third quarter results and current business trends, we are raising our sales and earnings guidance for the full year.

The third quarter represents our sixth consecutive quarter of positive comparable store sales growth and we continued to see broad-based strength across numerous categories. In the quarter, over 60% of our product categories comped positive with our top performers being candy, sporting goods, housewares, food, and toys. Our summer seasonal categories such as room air and summer furniture also contributed to our strong performance. The closeout deal flow is very strong. Consumers remain under pressure and we are looking — and are looking for ways to save money on branded merchandise they need and want in their homes. Manufacturers are creating new and innovative products, changing packaging and sizes, and competing for retail shelf space, which is all creating more closeout opportunities.

We are built for this environment. For over 41 years, Ollie’s has been selling brand-name products at drastically reduced prices which are 20% to 70% below traditional retailers. We are a trusted source with both our customers and vendor partners. Customers know they can find real brands and real bargains on products they need and use in their lives every day. Our vendors know we are a one-stop shop for managing excess inventory and closeouts. With over 500 stores and growing, our size and scale is becoming a real competitive advantage and we are seeing better access to deals across a growing number of categories and vendors. Our deal pipeline remains very strong. Deals drive our business and execution drives our success. The pandemic disrupted our execution in many ways and we have spent the last couple of years investing in our people, supply chain, distribution centers, stores, and marketing.

We are executing better across the business and this is driving productivity gains throughout the organization. Eric will speak to some of these in a moment. Ollie’s Army continues to be another bright spot with membership up almost 5% year-over-year and accounting for over 80% of our sales in the quarter. Our busiest and most exciting night of the year, Ollie’s Army Night, is this Sunday, December 10th. This is our way of saying thank you to our best and most loyal customers and giving them something special. Our stores are loaded with great deals and our teams are ready to welcome our loyal bargainauts. If you are an Ollie’s Army remember, we hope to see you there. If not, there’s still time to enlist and share in the fun and special savings.

To wrap it up, we are pleased with our third quarter results and the continued momentum in our business. We are executing across the board, buying great deals, managing our supply chain, opening new stores, and controlling our costs. We are well positioned to continue growing and scaling the business and remain confident with our ability to deliver against our long-term growth targets 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. Our results this quarter reflect the strength of our deals, the hard work and commitment of our incredibly talented team, and our efforts to improve execution across the organization. Process improvements and investments we have made in our people, supply chain, and stores are driving better productivity and execution. The most important pillar of our long-term strategy is store growth. In the third quarter, we opened 23 stores. This is a record number of openings in the quarter for Ollie’s. We are also excited to report we surpassed the 500-store milestone and expanded into another state, ending the quarter with 505 stores in 30 states. We have already opened another five stores in the fourth quarter, including our first store in Long Island, New York.

This puts us at 43 new stores this fiscal year with the two additional stores planned to open later this quarter. Turning to remodels. Our customers deserve an updated shopping experience that better showcases the amazing deals we offer in an organized and easy-to-navigate store format. We completed 12 stores during the quarter, bringing us to 26 stores through the first three quarters. We are on track to complete approximately 35 remodels this year. Moving to marketing. We continue to look for innovative ways to enhance and expand our marketing efforts. We are pleased with the performance of our streamlined flyer, which we believe better showcases our most compelling deals. During the quarter, we shifted one flyer out of the third quarter and into the fourth as planned.

We continue to broaden our reach and build our brand awareness through other forms of marketing. We executed a campaign around National Bargain Hunting Week, which included a survey as well as a media tour with lifestyle expert and influencer Limor Suss. This campaign generated over 500 million impressions. We are continuing to build on our success and have expanded the program to include over 50 influencers. The growth of our social media marketing program keeps — helps keep Ollie’s message of savings top of mind with existing customers and attract new customers as well. This is helping fuel our growth, especially with the younger customer demographic, which is our fastest-growing segment. Our collective marketing efforts led to a nice improvement in Ollie’s Army growth this quarter.

The customer file increased 4.8% year-over-year and sales from the army representing over 80% of our sales. We are encouraged to see that our compelling deals and enhanced marketing programs are attracting younger customers to the army. We also implemented a Military Appreciation discount day for all Ollie’s Army members who are veterans or active-duty military. Turning to supply chain. We continue to expand our distribution network to support our growth and are on track to open our fourth distribution center in Illinois in fiscal 2024. This will provide us the capacity to service an additional 150 to 175 stores as we expand into the Midwest. The expansion of our Pennsylvania distribution center was completed in August and we are seeing immediate benefits in throughput and operating efficiency.

These combined investments, give us the ability to service between 700 and 750 stores in support of our long-term target of 1,050 stores or more. Before I turn the call over to Robert, I would like to take a moment to thank our amazing associates who are value-obsessed and committed to the successful growth of our company. I am super proud of the excellent teamwork we continue to demonstrate each and every day in the execution of our business. Rob?

Rob Helm: Thanks, Eric, and good morning everyone. We are very pleased with our third quarter results, which came in ahead of our expectations. We delivered better-than-expected comp sales and flow-through to the bottom line. With the strength of the third quarter and continued momentum in our business, we are raising our sales and earnings guidance for the full year. In the third quarter, net sales increased 14.8% to $480 million, driven by a 7% increase in comparable store sales and new store unit growth. Our comp store sales growth was driven primarily by transactions and as John indicated, over 60% of our product categories comped positive in the quarter. Ollie’s Army increased 4.8% to 13.7 million members and sales to the army represented over 80% of total sales.

During the quarter, we opened 23 new stores, ending with 505 stores in 30 states, an increase year-over-year of 9.1%. Our new store productivity was very strong in the quarter and our new stores continue to perform above our expectations across both new and existing markets. Gross margin improved 100 basis points to 40.4% compared to last year, primarily driven by favorable supply chain costs, slightly offset by higher shrink and merchandise mix, gross margin was ahead of our expectations for this quarter and the outperformance was primarily driven by strong deal flow. SG&A expenses as a percentage of net sales leveraged 40 basis points to 29.5%, driven by the leverage of fixed expenses on the increase in comparable store sales, even after taking into account the impact of higher incentive compensation costs year-over-year.

Operating income increased 32.3% to $39 million and operating margin increased 100 basis points to 8.1% in the quarter. Adjusted net income increased 37.4% to $32 million and adjusted earnings per share was $0.51 compared to $0.37 last year. Adjusted EBITDA increased 29.5% to $51 million and adjusted EBITDA margin increased 120 basis points to 10.6% for the quarter. Turning to the balance sheet, our cash position remains strong with $264 million between cash on hand and short-term investments and no outstanding borrowings under our revolving credit facility. Inventories increased 2% to $532 million, primarily driven by new store growth, partially offset by the benefit of lower capitalized freight costs. Adjusting for these items, our inventory increased 5%.

Capital expenditures totaled $36 million in the quarter and were primarily for the development of new stores, the remodeling of existing stores, the completion of the company’s distribution center expansion in York, Pennsylvania, and the construction of our new distribution center in Illinois. During the quarter we bought back 143,000 shares of common stock for a total of $11 million. At the end of the quarter, we had $98 million remaining on our current share repurchase authorization, which the Board approved extending to March of 2026. 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. Based on our strong third quarter results and current trends in the business, we are raising both our sales and earnings outlook for fiscal 2023.

We are entering the fourth quarter, with momentum in our business, and are confident in our ability to execute. With a lot of businesses still ahead of us, including Ollie’s Army Night, we believe that we are well-positioned to deliver great deals to our customers. We do start to come up against more difficult comparisons in the fourth quarter and we’ll continue to take a measured approach to setting expectations. For the full year, which includes a 53rd week, we now expect total net sales of $2.097 billion to $2.104 billion, comparable store sales growth of 5.3% to 5.6%, the opening of 45 new stores less one closure, gross margin in the range of 39.2% to 39.3%, operating income of $221 million to $225 million, adjusted net income of $172 million to $176 million and adjusted net income per diluted share of $2.77 to $2.83 and annual effective tax rate of 25.2%, 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 a few comments on our fourth quarter expectations. We are raising our Q4 comp sales expectation to approximately 3%. This takes into account the shift of one flyer into the fourth quarter from the third. We expect to open seven new stores in the fourth quarter, although there is one store that is currently scheduled to open in late January, that could fall into early February. Now let me turn the call back over to John.

John Swygert: Thanks, Rob. Over the past 41 years, our team has grown to over 12,000 team members who are working harder than ever. The holiday season places extra demands on our team members and I thank them for all their hard work and dedication. It is the combined experience, passion, and commitment of the entire team that makes Ollie’s special. I’m grateful for our team and all that you do each and every day. 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 Instruction] Our first question will be coming from Brad Thomas of KeyBanc Capital Markets. Your line is open, Brad.

Brad Thomas: Hi, good morning, and congratulations on the nice quarter here.

John Swygert: Thanks, Brad.

Brad Thomas: John my — absolutely. Well deserved. Well, my question is really around how you’re thinking about same-store sales for 2024. You’ve long had the algorithm of sort of a 1% to 2% comp, but if we go back, I think that these last two quarters, I mean they really stand out. You had the pandemic period, you had the take-up period, if you go back about a decade ago. I mean these will prove to be some tough comparisons next year. How are you thinking at this point about same-store sales for next year?

John Swygert: Yeah, Brad. That’s a great question. I think obviously we have spent a lot of time here in our public life since 2015. It’s really setting the bar at a 1% to 2% comp at annual basis. This year is definitely outsized but we executed a lot better this year than we had in the prior two years. So, I’m pretty confident that for 2024, a 1%, 2% annual guide is where we’ll be.

Brad Thomas: That’s great. And then as a follow-up around margins, you’ve talked about getting back to that 40% gross margin hopefully next year. How are you feeling about gross margin as you look out to next year?

Rob Helm: Hey, Brad. This is Rob. We are confident in our ability to get back to a 40% gross margin. Obviously, supply chain costs are a nice tailwind for us now. We don’t anticipate for them to head back in the other direction. So we feel like that will be where it is. I think that shrink has stabilized. It’s not getting any worse, slightly better on a full year. But I think that with that being flat we could certainly achieve the 40% gross margin.

Brad Thomas: That’s really helpful. Thanks so much.

Operator: And one moment for our next question. And our next question will be coming from Peter Keith of Piper Sandler. Your line is open, Peter.

Peter Keith: Hi, thanks. Good morning, everyone. Nice quarter from me as well. To follow on Brad’s first question, just thinking about the compare for 2024 and expectations to comp 1% to 2%, curious if there are things that you can be doing now to sort of set that foundation and drive the continued growth against these compares?

John Swygert: Yeah. Peter, we are a closeout retailer and we buy what’s available in the marketplace. So we always remind everybody comping quarter by quarter can be a little challenging sometimes but annually we do believe the deals will present themselves. The biggest thing we can do as an organization to be able to set ourselves up for success is to be able to execute consistently and I think we are doing that now and I think that’s what we are going to be continuing to focus on going forward. The deals drive the business without a doubt and the merchants are working each and every day to try to do better and better year-over-year. So that’s what we’ll be focused on going out of this current fiscal year.

Peter Keith: Okay. And I know every year is a pretty good buying environment. For what it’s worth, it does seem like your stores have a really good assortment of brand-name merchandise right now and I know you’re always trying to drive to pretty consistent merch margin. So I’m wondering if actually the pricing gap that you have perhaps has widened a little bit to some of your key competitors, or just better deal environment, more opportunistic pricing and you hold the merch margin you can give consumers a better values. Is that something you guys are playing for right now?

John Swygert: We are not. We are planning to try to get back to the 40, Peter. We’re not there yet. We obviously did a very good job in Q3 and we feel pretty comfortable with Q4, but at the same time, we don’t have visibility out that far to be able to say what we are going to see what’s going to be presented to us next year, but our number one focus is to give the best value to the consumer to motivate them, especially on the discretionary items, but if we can do better, we’ll do better. But right now, we would tell you that we are going to try to get to the 40 and then we’ll go from there.

Peter Keith: Okay. Thanks and good luck.

John Swygert: Thank you, Peter.

Operator: And one moment for our next question. And our next question will be coming from Kate McShane of Goldman Sachs. Your line is open, Kate.

Kate McShane: Hi, good morning. Thanks for taking our question. Wondering if you could walk through the cadence of comps that you saw throughout the quarter and I know you discussed the categories have performed well during the quarter, but where did you see maybe some weakness within certain categories? And how has that trended into Q4?

Rob Helm: I will take the cadence and then I’ll hand it off to John for the categories. From a cadence perspective, the strength that we saw from Q2 spilled over into the beginning parts of the third quarter. August and September we are pretty much equally strong and then October was a little bit softer, but that was as planned as a result of the flyer change that we had talked about on the last call.