Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q4 2022 Earnings Call Transcript

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q4 2022 Earnings Call Transcript March 22, 2023

Operator: Welcome to Ollie’s Bargain Outlet Conference Call to discuss the financial results for the Fourth Quarter and Full 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 that 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 today’s call from Ollie’s management are John Swygert, President and Chief Executive Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer; and Rob Helm, Senior Vice President and Chief Financial Officer. I will now turn the conference call over to your host today Lyn Walther with ICR. Please go ahead.

Lyn Walther: Thank you. Good morning, and welcome to Ollie’s fourth quarter conference call. A press release covering the company’s financial results was issued this morning and a copy of that release can be found in the Investor Relations section of the company’s website. I want to remind everyone that management’s remarks on this call may contain forward-looking statements, including, but not limited to predictions, expectations or estimates, and that actual results could differ materially from those mentioned on today’s call. Any such items including with respect to our performance should be considered forward-looking statements within the meaning of the 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.

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 description 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, Lyn, and good morning, everyone. Thank you for joining our call today. We were pleased with our performance during the fourth quarter, which reflected an improvement in our comparable store sales as we moved through each month of the quarter. We executed well despite the highly promotional environment and generated a 3% increase in comparable store sales ahead of our expectations. Our strong comparable store sales combined with our new store growth drove a 9.7% increase in total sales for the quarter. We are encouraged by the transaction trends we experienced in the fourth quarter as customers responded to our incredible deals. Our strongest categories were food, candy, health and beauty, seasonal, and automotive, while we experienced some softness in discretionary categories such as toys, and bed and bath.

Our gross margin improved 110 basis points during the fourth quarter to 37.6% compared to 36.5% last year, driven by lower supply chain costs due to increased productivity and reduced transportation expenses. Merchandise margin was flat to last year despite increased promotional markdowns and an uptick in shrink. We were pleased with our ability to navigate these challenges and deliver an improved gross margin compared to last year. On the bottom line, we delivered a 19.5% increase in adjusted net income driven by increased comparable store sales, improved gross margin, and disciplined expense control. As deal flow continues to be strong, we are selectively investing in price to motivate consumers given the competitive environment, while maintaining our gross margin targets.

As consumers need to save money, the strength of our value proposition is resonating and we have seen an acceleration in our business over the past few months. We believe we are well-positioned to thrive in the current environment and our customers are responding to the tremendous values in our stores. Our deal pipeline is robust and we are excited about the opportunities ahead of us. In terms of marketing, we are focused on developing greater brand awareness, particularly in newer markets, and see opportunities to strengthen communication of our deals to be more clear and impactful. We continue to work to elevate our messaging and optimize the balance between print and digital media to drive traffic. We are pleased with the results of our influencer program and we’ll make this part of our marketing mix going forward.

Ollie’s Army continues to grow steadily and remains a key driver of our sales, accounting for almost 80% of our sales in the fourth quarter. The Army grew 4.8% over the prior year, ending the period with over 13.2 million active members. We were pleased with Ollie’s Army Night, an event where we offer exclusive deals and discounts to our most loyal customers. We continue to build our civilian database comprised of non-Ollie’s Army shoppers which is being used for email, messaging and other digital marketing initiatives. We remain confident in our business model and are focused on three strategic pillars: offering compelling deals, expanding operating margins, and growing our store base. I will discuss the deal flow and then turn the call over to Eric to review expanding our operating margins and growing our store base.

The closeout market remains extremely strong. The disruptions in the market today have led to one of the most robust closeout environments we have seen in a long time. With last year’s supply chain challenges we are seeing incredible opportunities for our customers from many different suppliers. Our longstanding vendor relationships makes us the preferred first call for the best deals on some of the best brands in the market. New vendors are reaching out to us each and every day because of our scale and how easy we are to work with. We have an experienced merchant team with the know-how to get the best deals for our customers. We are focused on adding more newness and sizzle to the product offerings, which creates a sense of urgency and drives shoppers to our stores.

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While we are incredibly excited about the opportunities in front of us, we recognize the pressures consumers are facing today and will remain disciplined and selective in our buys, which we believe will position us to deliver, both good stuff cheap to our customers and strong margins to our shareholders. I’m now going to turn the call over to Eric to discuss the other strategic pillars. Eric?

Eric van der Valk: Thanks, John, and good morning, everyone. Our second strategic pillar is to expand operating margins. We made great progress toward this goal in the back half of fiscal 2022, but know there is more work ahead of us. We see a clear path to expand operating margins over time by leveraging supply chain enhancements while retaining the gains we have made in merchandise margin, increasing leverage through growth in scale, and maintaining our strong expense management discipline. Our approach to import freight procurement will continue to benefit us and we are seeing transportation costs in the market continue to ease. Our third priority is to grow our store base. We opened five stores in the fourth quarter ending the year with 468 stores in 29 states compared to 431 stores last year.

We are planning to open 45 stores in fiscal 2023 slightly below our long-term target of 50 stores to 55 stores annually, due to the longer lead times for permitting and construction we have experienced. However, we remain confident in our ability to open at least 1,050 stores and plan on returning to our normal store opening cadence for fiscal 2024. To improve our customer shopping experience in our existing stores, we began testing a store remodel program last year and we are pleased with the results of the first 21 stores. We made changes to our store layouts such as improving category flow and sight lines, updating race tracks, and adding checkout queues. Our initial results give us the confidence to continue to expand this program and we plan to remodel an additional 30 stores to 40 stores in fiscal 2023.

We are benefiting from the enhancements we have made to our supply chain and we will continue to make additional investments to support our store growth. The expansion of our Pennsylvania distribution center is well underway and we expect it to be completed by the second quarter of 2023. We plan to break ground soon on our fourth distribution center in Illinois, which we expect to open in the second quarter of fiscal 2024. When the network expansions are completed, we will have the capacity to support over 700 stores. We believe that the investments we are making will position us to deliver consistent long-term growth. Before I hand it over to Rob, I’d like to thank our almost 11,000 teammates for their hard work and commitment to making Ollie’s a special experience for both our associates and customers.

Rob will now take you through our financial results and our outlook for fiscal 2023 in more detail. Rob?

Rob Helm: Thanks, Eric, and good morning, everyone. I’m going to start with a review of our fourth quarter performance, then I’ll provide our guidance for fiscal 2023. Starting with the fourth quarter, we are pleased to deliver strong results above our expectations. Net sales totaled $550 million, an increase of 9.7% from the prior year. Comparable store sales increased 3% in the quarter compared to last year, driven primarily by an increase in transactions. During the quarter, we opened five new stores ending the quarter with 468 stores in 29 states and 8.6% increase in store count year-over-year, and while early, we are pleased with the performance in these new stores. Since the end of the fourth quarter, we’ve opened an additional eight stores and closed one store location.

Gross profit margin improved 110 basis points to 37.6% compared to 36.5% in Q4 last year due to lower supply chain costs. Merchandise margins for Q4 were flat to last year despite the highly promotional environment. Similar to other retailers, we did experience an uptick in shrink during the quarter. SG&A expenses as a percentage of net sales were flat to last year at 23.8%. Operating income totaled $68 million for the quarter, an increase of 17.8% compared to last year. Operating margin increased 80 basis points to 12.3%, driven by the lower supply chain costs and new store unit growth, partially offset by higher selling expenses. Adjusted net income increased 19.5% to $52 million and adjusted earnings per share was $0.84 compared to $0.69 last year.

Adjusted EBITDA increased 16.7% to $77 million and adjusted EBITDA margin increased 80 basis points to 14% for the quarter. Turning to the balance sheet. Our balance sheet cash position remained strong with $271 million between cash on hand and short-term investments and no outstanding borrowings on our revolving credit facility at year-end. Inventory 1% to $471 million in the quarter compared with $467 million a year ago. We are pleased with our inventory position entering 2023 and are starting to see the benefits of lower freight costs and the normalization of lead times in our in-transit inventory, which combined represented a total of $35 million. Adjusting for these items, our remaining inventory increased approximately 12% in line with our expectations.

Capital expenditures totaled $13 million primarily for new and existing stores and the expansion of the Pennsylvania distribution center. This compares with $5 million in the prior year. During the quarter we invested $12 million to repurchase shares of our common stock. We repurchased $42 million during the year and have $138 million remaining on our share repurchase program authorization. We remain 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 fiscal 2023. While we are confident in our trends and our current momentum and believe that we are well-positioned, we are planning our business more in line with our long-term annual target of 1% to 2% comp store sales growth, coupled with the new unit growth of 45 stores.

With that framework in place, for the full year, which includes a 53rd week, we expect total net sales of $2.036 billion to $2.058 billion; comp store sales of 1% to 2%; the opening of 45 new stores, less one closure; gross margin in the range of 39.1% to 39.3%; operating income of $205 million to $213 million; adjusted net income of $156 million to $263 million; and adjusted earnings per share of $2.49 to $2.58, both of which exclude excess tax benefits related to stock-based compensation. An annual effective tax rate of 25% which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately $63 million. We are planning for capital expenditures in the range of $125 million with approximately $75 million year marked for the construction of our fourth distribution center and the expansion of our Pennsylvania distribution center.

The remaining $50 million will be for new stores, existing store remodels and maintenance capital, IT investments, and general corporate projects. I also wanted to take a moment to give some additional color on how we’re thinking about the quarterly flow during the course of the year. As I mentioned earlier, we are seeing positive momentum in our business right now and we expect to deliver Q1 comps at the high end of our annual guidance range. Moving ahead to Q2, we are planning comps to the midpoint of our annual guidance range. For Q3, we anticipate comp sales to be flat to last year due to a strategic change in flyer timing between Q3 and Q4. As a result, we would expect Q4 comps to be slightly above the high end of our annual guidance range.

We expect preopening expenses to be approximately $15 million. of our new store openings this year is more weighted to the back half of 2023. Approximately 40% of our openings will be in the first half of the year and 60% will be in the second half. From a gross margin perspective, we’re planning for a significant improvement in the first half of the year as we lap the impact of the elevated supply chain costs in 2022. As we begin to anniversary more normalized supply chain costs in the back half of the year, we expect to deliver modest year-over-year margin expansion. We expect depreciation and amortization expense to be approximately $35 million including approximately $8 million that runs through cost of goods sold and we anticipate net interest income in the range of $5 million.

I will now turn the call over to John for his closing remarks.

John Swygert: In closing, I’d like to thank the entire Ollie’s team for their incredible hard work and dedication each and every day. We are well positioned today as ever for growth and we are positioned to deliver good stuff cheap to our customers. We feel very good about the current trends and momentum in our business from deal flow, to expense control, to new stores and look forward to updating you on the progress on our first quarter call. As we say, we are Ollie’s. We will now take your questions. Operator?

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Q&A Session

Operator: Our first question comes from the line of Peter Keith from Piper Sandler. Your question please.

Peter Keith: Hey, good morning, everyone. So, John, you had mentioned that your value proposition is really starting to resonate with your customers. If you look back on 2022, it did seem like the comps were a little bit disappointing. Do you think that the markdown and cleared environment across retail maybe diluted your value proposition and now that we’re pivoting the 2023 that the value proposition has a better time to shine?

John Swygert: Peter, I think that’s definitely part of it. I think the I talked about before, the timing of when the inflation would take hold and when people start changing their habits. I think, between the inflation and the timing of that occurring plus how promotional other retailers are being last year, definitely impacted the value prop. But we have — the deals are great. People are responding to them right now. So we’re excited and as we said, we think 2023 we’re — was set up for us to shine and I think it’s going to play out that way.

Peter Keith: Okay, great. And just another question I had just on the various puts and takes around fiscal stimulus. So there’s been a pretty big, call it, increase for social security recipients, which is snap cuts. Any observation on how those puts and takes might be impacting your sales or traffic trends?

Eric van der Valk: Peter, it’s Eric. We are seeing that the strongest growth in terms of each segment is coming from our older and more mature customers at 61– age 61 and up. Potential influences could be the adjustment to social security benefits depending on what it means in terms of discretionary income for that customer base also could be that customers are feeling more safe to shop. So we’re seeing the customer engage more frequently with us than they have over the last two years. And then we’re not sure what tax refunds may mean to that group and that’s to be determined.

John Swygert: Yeah. And definitely, Eric — Peter, one other thing the SNAP benefits, obviously there’s something there, but as well I say, we’re not really a low-income destination. We don’t take EBT. We don’t have perishables in our stores. That’s not really our core customers. So there’s obviously some impact there, but not anything material that would get us any real big pause.

Peter Keith: Okay. Sounds good. Thank you and good luck.

John Swygert: Thanks, Peter.

Operator: Thank you. One moment for our next question. And our next question comes from the line of Eric Cohen from Gordon Haskett. Your question, please.

Eric Cohen: Hi, thanks, and great quarter. You guys have talked about the really strong closeout environment for several quarters now, and it sounds like it’s still growing really strong, and typically pre-pandemic you guys were doing a 3% to 4% comp pretty consistently, so given how strong the environment you’ve been talking about is 1%, 2% just conservatism or is there anything structurally different about the business today?