Yahoo Finance Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q1 2024 Earnings Call Transcript
Ollie's Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q1 2024 Earnings Call Transcript June 5, 2024
Ollie's Bargain Outlet Holdings, Inc. beats earnings expectations. Reported EPS is $0.73, expectations were $0.65.
Operator: Good morning, and welcome to Ollie's Bargain Outlet's Conference Call to discuss financial results for the First Quarter of Fiscal Year 2024. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and interactive instruction will follow at that time. Please be advised that this call is being recorded and 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, Chief Executive Officer; Eric van der Valk, President; and Robert Helm, Executive Vice President, and Chief Financial Officer. Certain comments made today may constitute forward-looking statements 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 annual report on Form 10-K and quarterly reports on Form 10-Q 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.
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John Swygert: Thank you, and good morning, everyone. We appreciate you joining our call today. We are extremely pleased with our performance this quarter. Our team has executed at a very high level, offering amazing deals to our customers, delivering consistent financial results and investing into our future. Our first quarter comparable store sales, total revenue, gross margin and expenses were all better than expected, and this resulted in a 49% increase in adjusted earnings per share. Consumers clearly remain under pressure and are seeking value when making their purchases. Our unique business model is delivering exceptional values on branded merchandise that our customers want and need at prices 20% to 70% below the fancy stores.
Everyone loves the bargain, and bargain is our middle name. There are a few important things propelling our business that we wanted to touch on today. The first is the growth in the closeout industry. Large consumer retailers supplied by large product manufacturers are constantly introducing new products and packaging and this is leading to growth in the closeout industry. The second is our increasing size and scale. While the closeout industry is growing, the number of bigger players buying and selling closeouts today is shrinking. Operating a closeout retailer is not for the faint of heart. And over the years, there have been a number of failures because they were not set up properly. We are, by far, the largest buyer of closeout products, and this has been our only business for almost 42 years.
Nobody has our know-how, size and scale or credibility in the closeout market. As a result, our purchasing power is growing, and we are becoming more and more meaningful to our vendor partners. The third driving theme is the investments we have made back into our business to drive execution, productivity and growth. This is an area that we probably don't talk about enough. While it's the great deals and product offerings that will always be the key to driving our business, it's investments in our people, supply chain, stores, marketing and systems that enhance our execution, propel our margins and position us for continued long term success and profitable growth. On that topic, I would like to discuss two recent announcements. The first is a purchase agreement for a group of 99 Cents Only Stores.
Eric will provide more details on this in a moment, but we were very excited about these stores. They have attractive rents, longer lease terms, demographics that align nicely with our core customer and are located in key markets across Texas, where we have a meaningful growth opportunity. I spoke earlier to the shrinking number of closeout players and 99 Cents Only bankruptcy filing and store closures is further validation of this. The second piece of news supporting our long-term growth and success is a number of executive promotions and appointments as part of a rigorous succession planning process conducted by our Board of Directors. I have been with the company for over 20 years and enjoyed every minute, but it's my desire to step up to the Executive Chairman role and pass the CEO baton on to Eric in early 2025.
Since joining Ollie's, Eric has played a pivotal role in the company's growth and success. He has transformed key areas of the business, including supply chain, store operations and store design, all of which resulted in improved execution and operating efficiencies. This, combined with his closeout merchandise experience makes him the ideal person for his new role. Effective today, I am proud to announce that he's been promoted to President. Also effective today, Rob Helm, has been promoted to Executive Vice President and will take on the added responsibilities of managing real estate. Both Eric and Rob have strengthened our leadership team and the promotions are well deserved. I look forward to working with them for years to come. Finally, we announced today the hiring of Chris Zender to the role of Executive Vice President and Chief Operating Officer effective June 17.
Chris brings a vast wealth of operational and leadership experience from a number of deep discount and closeout retailers. We have a great team, and I will work with them to ensure a smooth transition early next year. The business is in very good -- in a very good place, and we are well positioned to keep winning into the future. Now it is my pleasure to turn the call over to Eric.
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Eric van der Valk: Thanks, John. I appreciate the confidence you and the board having me to lead our company into its next phase of growth. John alluded to this, but we really outperformed on every level in the first quarter. Our results are a function of the strong deal flow and execution of our team. The process improvements and investments we have made in our people, supply chain, stores and marketing continue to pay off in the form of better productivity and consistent financial results. These investments include wages across both our distribution network and our stores. Enhanced operational teams across major functional areas such as marketing, real estate, loss prevention and supply chain, upgraded distribution and transportation capabilities, new technology and systems, a store remodel program and a retooled marketing strategy with expanded digital capabilities.
These and other investments have also made us a more nimble organization, capable of handling unplanned events and circumstances such as the collapsing of the Baltimore bridge. Within hours of this event, we took action to reroute ocean containers to alternate ports, which resulted in minimal delays, disruptions or incremental costs. This was only possible because of the upgraded team, new systems and new carrier contracts that we put in place a few years ago to provide increased visibility and flexibility around international freight. As a reminder, almost 90% of our foreign shipping requirements are covered under contract, and we have very little exposure to the spot market. In May, we negotiated our annual international carrier contracts at favorable rates.
I'm also pleased to report that our new distribution center in Princeton, Illinois has begun receiving product and is on track to start shipping stores in late July. The construction of the building, installation of our racking and automation solutions and staffing of the new facility is going as planned and within budget. This fourth distribution center will have the capacity to support an additional 150 to 175 stores. This will give us the ability to service up to 750 stores. We are excited about the recently acquired 99 Cents Only Stores. As John mentioned, this is a group of 11 stores located in key markets in Texas, three are owned properties and the balance are leases. These stores are the right size located in good trade areas have attractive occupancy costs and have been servicing value-oriented customers for many years.
Texas is a great market for us where we have tremendous growth opportunity. It's hard to find good locations with the type of rent structures that we typically require, and these stores will significantly strengthen our presence in key markets across the state. On the marketing front, we continue to shift advertising dollars into various digital and social media platforms, including influencers across TikTok, Instagram and Facebook. This is helping us reach new and younger customers and keeping our brand top of mind with existing customers. Our growing customer base is reflected in our Ollie's Army numbers. Consistent with prior trends, we are seeing growth in the younger customer demographic and also in younger customers joining the Army. Lastly, we continue to benefit from the trade down effect we have experienced over the last few quarters and are seeing strong retention from this customer cohort.
Before I turn the call over to Rob, I would like to thank the entire Ollie's team for their continued support and confidence in my leadership of this amazing business. I am honored to be named President and looking forward to working with John and the executive team on the CEO transition. We are a super unique organization that is rooted in great people, experience and an amazing culture. Rob?
Robert Helm: Thanks, Eric, and good morning, everyone. We are very pleased with our strong start to the year. Our first quarter results came in ahead of our expectations across the board, driven by strong comparable store sales, significant gross margin expansion, continued discipline [Technical Difficulty] and higher interest income. In the first quarter, net sales increased 11% to $509 million, driven by new store growth and a 3% increase in our comparable store sales. Transactions, basket and average retail were all up in the quarter, with basket being the biggest driver of the comp. The 53rd week last year and the shift in the Easter holiday this year created some movement in our ad calendar year-over-year, which made for some choppy weekly comparisons.
Barring these shifts, our underlying comp trends were strong and accelerated as we moved through the quarter. Our category strength was broad-based with over 50% of our product categories comping positive. Our best performing categories were lawn and garden, housewares, food, sporting goods and candy. Ollie's Army membership increased 7% to 14.2 million members and sales to our members represented over 80% of total sales. During the quarter, we opened four new stores ending with 516 stores in 30 states, an increase of 8% year-over-year. We are pleased with the performance of our new stores, which continue to perform in line with our expectations. Gross margin increased 220 basis points to 41.1% primarily due to favorable supply chain costs and higher merchandise margins.
SG&A expenses were well controlled in the quarter and decreased 40 basis points as a percentage of net sales to 28%, driven by leverage of fixed expenses on the increase in comparable store sales. Operating income increased 47% to $56 million, and operating margin increased 270 basis points to 11.1% in the quarter. Adjusted net income increased 47% to $45 million, adjusted earnings per share increased 49% to $0.73. Lastly, adjusted EBITDA increased 40% to $69 million, and adjusted EBITDA margin increased 280 basis points to 13.6% for the quarter. Turning to the balance sheet. Our balance sheet remains very strong and is a significant strategic asset, which provides us maximum flexibility to drive growth and maximize shareholder returns. We ended the quarter with $342 million between cash on hand and short-term investments and no outstanding borrowings under our revolving credit facility.
Inventories increased 6% to $527 million, primarily driven by new store growth. Capital expenditures totaled $27 million for the quarter and were primarily related to our new distribution center in Princeton, Illinois, the remodeling of existing stores and the development of new stores. We are committed to returning capital to our investors through share repurchases, while balancing our strategic growth opportunities and working capital needs. With some of the share price volatility in the quarter, we stepped up our repurchase activity and bought $25 million of our common stock. Turning to our outlook for 2024. We are pleased with our strong start to the year and are raising both our sales and earnings outlook for fiscal 2024. For the full year, which is a 52-week year compared to 53 weeks in 2023, we now expect total net sales of $2.257 billion to $2.277 billion, comparable store sales growth of 1.5% to 2.3%, gross margin of approximately 40%.
Operating income of $250 million to $258 million, adjusted net income of $196 million to $202 million and adjusted net income per diluted share of $3.18 to $3.28, which assumes an annual effective tax rate of 25.5%, which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately 62 million. Lastly, let me provide color on how we're thinking about the quarterly comp and store opening cadence as well as a few other numbers to help with your models. For Q2, we are planning comps around the midpoint of our long-term algo of 1% to 2%. Although, we are currently running ahead of this, July represents a very challenging monthly comparison for us. For Q3, we anticipate comp sales to be flat due to a shift of one flyer from Q3 into Q4.
As a result of the shift, we'd expect Q4 comps to be slightly above the high end of our long-term algo. For new store openings, we're still targeting a total of 50 new stores, less two closures that we chose not to renew. As Eric discussed in his remarks, we are very excited to be the winning bidder of 11, 99 Cents Only Stores. Since we will start to incur occupancy expenses on these locations at closing, our goal is to open these stores as fast as possible. With these new stores, we will likely push a handful of our original plant openings from 2024 into early 2025. Over the course of the next 18 months, we now expect to open a higher number of stores than originally planned. In addition, the shift of a few stores into early next year also means that opening cadence will be more front-end loaded next year, which should benefit both full year sales and earnings.
We're still working through some of this real time. but we're now modeling approximately six new store openings in the second quarter, 30 in the third quarter and 10 early in the fourth quarter. While we haven't yet taken physical possession to these stores to complete a thorough assessment, we'd expect the remodeling cost of a 99 Cents Only store to be a little higher than a typical opening. With that in place, we would expect capital expenditures to be approximately $90 million, which excludes the $14.6 million purchase price for these locations, and preopening expenses to be in the range of approximately $17 million for the year. In terms of gross margin, our first quarter was our easiest comparison for the year. As a result, we would expect the increases in second and third quarters to be much more modest and the fourth quarter to be down slightly.
Keep in mind that gross margins in 2Q and 4Q are historically lower than 1Q and 3Q. We are planning for depreciation and amortization expense of approximately $42 million, which includes $11 million that runs through cost of goods sold. Lastly, we expect net interest income of approximately $14 million. We are now modeling the consensus view of one rate decrease in the back half of the year, instead of the three decreases contemplated in our original guidance. Now let me turn the call back over to John.
John Swygert: Thanks, Rob. We operate a very unique business model that involves everyone from every level to make us successful. I am very proud of the entire team for their hard work and dedication. We love saving customers money and selling good stuff cheap and it's this passion that brings all of us together and drives the Ollie's culture. It has been a privilege to be part of Ollie's expansion over the last 20 years and to watch this grow from $100 million in sales to over $2 billion in sales. We have so much more growth ahead of us. And in many ways, we are just getting started. We are Ollie's. That concludes our prepared remarks, and we are now happy to take questions. Operator?
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