Ollie's Bargain Outlet Holdings, Inc.

It's Bargain Outlet conference call to discuss financial results for the third quarter of fiscal 2020. At this time, all participants are on a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization from OLLI. As a reminder, this call is being recorded. On the call today from management are John Schweigert, President and Chief Executive Officer, and John Stas, Senior Vice President and Chief Financial Officer. I will turn the call over to Jean Fontana, Investor Relations, to get started. Please go ahead, ma'am.

Thank you, and good afternoon, everyone. A press release covering the company's third quarter 2020 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section of the company's website. I want to remind everyone that 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 included 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. 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, such as adjusted EBITDA adjusted net income, and adjusted net income per diluted share that we believe may be important to investors to assess our operating performance. Reconciliations of the most closely comparable GAAP financial measures to these non-GAAP financial measures are included in our earnings release. With that, I will turn the call over to John.

Thanks, Jean, and hello, everyone. Thanks for joining our call today. We hope that you and your families are staying healthy and safe. I want to express my gratitude to the entire Ollie's family for their tireless work to serve our customers while maintaining a healthy and safe shopping environment. That has been and remains our number one priority. The team's efforts and ability to rally together during these times has been nothing short of extraordinary. Our results were made possible by the steady execution and resilience of our entire organization, the merchants, our distribution center teams, the store support center, and our store associates. I sincerely thank each and every one of them. We delivered an outstanding third quarter. This strong performance reflects our ability to react to opportunities in the marketplace and changes in consumer demand even during these challenging, unprecedented times. Our overall performance was driven by robust sales growth. Great deal flow, productive new stores, and strong comparable store sales drove a 27% increase in our top line. Comparable store sales increased 15.3% in the quarter. This top line growth combined with gross margin expansion and tight expense control led to an adjusted net income growth of 61%. Our sales were once again broad based with almost three quarters of our departments comping positive. Our top performing categories were housewares, bed and bath, health and beauty aids, flooring and food. While we cannot predict the direction of the pandemic from here, we remain laser focused on the execution of our plans. As you know, it all begins with amazing deals. Deals that provide incredible values to our customers across all of our merchandise categories. The merchant team continued to leverage our strong, long-standing vendor relationships for product and sourcing from new vendors. For instance, we worked with a new major supplier of over-the-counter cold, cough, and flu medicines, a really good get. Our scale and our visibility makes deals like this happen. The merchants are continuing to identify and source great deals that deliver exceptional value to our customers. Deal flow remains as strong as ever. Close-out opportunities are generated in a variety of ways, ranging from excess inventory, overruns, and package changes to product innovation and bankruptcies. We are seeing large deals each and every day, and we are well-positioned to capture these opportunities. We have the long-term vendor relationships, the proven ability to handle large deals, and an exceptionally strong liquidity position to make it happen. In terms of on-hand inventory, we chased the business a little during the quarter due to our continued sales velocity. We are pleased with our ending inventory position, up 2.5% compared to last year. There's a ton of product flowing. We are increasing receipts and pushing product to our distribution centers and into our stores at record levels, even in the midst of the busy holiday selling period. Having said all that, my end goal is to run with less inventory per square foot than we have historically averaged. Well-managed, leaner inventories give us the flexibility from an open-to-buy standpoint to ramp up receipts for opportunistic purchases. Maintaining this dry powder allows us to more quickly respond to changing consumer demands as well, as demonstrated by our success over the past two quarters. I believe our customers also benefit from reduced store inventory levels with an improved shopping experience in a crisp, clean store. Fresh new deals are in front of the customer presenting a call to action. OLLI's Army continued to be a big driver of our sales in the third quarter and membership just keeps growing. This was the second biggest increase in new customer signups in OLLI's history. We ended the period with 11.4 million active members, a 13.9% increase over the prior year. New customers have contributed to the growth of the OLLI's Army numbers and have helped drive increases in sales and transactions. We are very excited to have these new customers enlisted in the Army. We will continue to utilize the tools we have for onboarding, including special benefits such as enlistment bonuses, and communicating our new and exciting deals to ensure these customers become long-term OLLI's Army members. As we have stated in the past, Army members shop our stores more often and drive a substantially larger basket. We are in the early stages of enhancing our marketing programs and redeploying dollars to optimize spend. Our focus continues to be on deepening engagement with existing customers as well as attracting lookalike customers. We have been pleased with early reads so far and will continue to test some new digital initiatives such as customized ads. We will continue to test, learn, and ramp up where tactics are most successful and dollars best deployed. We're also making a change to our event calendar this year due to the pandemic. Instead of Ollie's Army Night, normally one exclusive evening of shopping for Army members, we're going to have Ollie's Army Week with the same special rewards for the members as always. The event will run from Sunday, December 13th through Saturday, December 19th, giving customers an entire week to get great deals. Importantly, the week-long event will be safer for our associates and our customers. This year, the fun and savings will just be stretched out a little bit longer. Our new stores continue to be a significant driver of our growth. New store performance in the quarter and year-to-date exceeded our expectations. We achieved these outstanding results even with limited marketing events as we sought to comply with social distancing guidelines. We have opened a total of 46 new stores this year, including one relocation, and I am very proud of the team's ability to execute these projects despite the added complexities of opening and operating during the pandemic. We are a growth company in one of the most attractive sectors in retail, the closeout industry, and we believe we have the scale, the know-how, and the relationships to benefit from the continued disruption in the marketplace. We are laser focused on expanding our retail footprint, and we believe the extreme value proposition of our business model very much supports our growth plans. With tremendous runway for growth, we are excited about the availability of great real estate sites as we continue to build out our store pipeline. We see new stores as an important component of our long-term growth algorithm with a target of 50 to 55 stores per year. Our 2021 pipeline looks strong with a solid mix of both existing and new markets, with expectations of 50 store openings, including up to four relocations. Turning to the fourth quarter, our comp stores moderated in the latter part of the third quarter and continue to do so now, with quarter-to-date positive comps in low single digits. In the first few weeks of November, we saw some impact from the timing of our peer promotional calendars around Black Friday, as well as some impact in cold weather categories. We were pleased with Black Friday weekend sales as they were in line with our expectations. As Mark would say, we are locked and loaded for the remainder of the holiday season. We have a lot of big weeks ahead of us, including Ollie's Army Week beginning December 13th. There remains a great deal of uncertainty related to COVID, and we cannot predict the impact of the continuing health and financial crisis on consumer behavior. As always, we will tightly manage what is in our control, and we feel very good about our ability to provide great holiday deals to our customers. We will continue to do what we do best, stay focused and execute. Looking ahead, our long-term growth algorithm remains intact, and I am bullish as ever about the future prospects. It was one year ago that we unexpectedly lost our co-founder, CEO, and friend, Mark Butler. Mark was passionate, talented, and a highly regarded leader, loved and sorely missed by the entire OLLI family. I know Mark will be proud of how we have rallied together to carry his legacy forward so successfully. I could not be prouder of how our business and team has responded over the challenging years since Mark's passing. I want to thank our almost 11,000 team members for all they are doing to serve our customers and communities and support each other during these demanding times. As we say, we are Ollie's. I'll now hand it over to Jay to take you through the financial results.

Thanks, and good afternoon, everyone. Like John, I also want to express my gratitude to the entire OLLIES team for their amazing dedication and teamwork. We appreciate all that you do. We are very pleased with our third quarter results. Net sales increased 26.7% to $414.4 million. Comparable store sales increased 15.3% in the quarter, driven by increases in both average basket and transactions. During the quarter, we opened 19 new stores, including one relocation, ending the quarter with 385 stores in 25 states and an 11.6 year-over-year increase. Since quarter end, we have opened four more stores for a total of 46 new stores for the year. Our new stores continue to perform above our expectations across both new and existing markets. Gross profit increased 28.7% to $171.5 million, and gross margin increased 60 basis points to 41.4%. The increase in margin was due to improvement in the merchandise margin, partially offset by higher supply chain costs due to increases in domestic and import carrier rates and additional DC operating costs driven by continued labor and wage pressures. SG&A expenses increased 17% to $105.8 million, primarily due to additional selling expenses from our new stores and higher store payroll to support the increase in sales. SG&A as a percentage of net sales decreased 220 basis points to 25.5%. The decrease was driven by leverage in occupancy and many other costs due to our strong sales performance and continued tight expense control. Operating income increased 61.7% to $57.8 million in the quarter from $35.7 million last year. Operating margin increased 300 basis points to 13.9%. Adjusted net income, which excludes tax benefits related to stock-based compensation, increased 61.1% to $43.2 million from $26.8 million last year. Adjusted diluted earnings per share increased 58.5% to $0.65 from $0.41 in the prior year. Adjusted EBITDA increased to $65.3 million from $42.6 million, and adjusted EBITDA margin increased 280 basis points to 15.8%. Capital expenditures in the quarter totaled $7.8 million compared with $24.2 million in the prior year. Last year expenditures included approximately $13 million for the construction of our new DC. At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $326 million in cash. With our very strong balance sheet and robust cash flow, we have the capacity and flexibility to navigate these times. While we are optimistic about the momentum of our business, there is increasing uncertainty related to COVID-19 and its potential impacts, which could affect consumer demand. For these reasons, we are continuing our practice of not providing specific guidance for the balance of the year. As always, we remain confident in our ability to execute. We have delivered great results in both strong and challenging economic cycles. We look to maintain consistent gross margin performance and closely manage our expenses, just like we always do. The flexibility of our business model enables us to pivot quickly when navigating uncertain times, and our strong results demonstrate this. The strength of our model and the opportunities for new customers, deal flow, and real estate that we expect to capture from this environment have us even more excited in our long-term growth algorithm and as well-positioned as ever to grow to our target of 1,050 stores. I'll now turn the call back to the operator to start the Q&A session. Operator?

Thank you. To ask a question, you will need to press star then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Matthew Balls with J.P. Morgan. Your line is now open.

Great, thanks. So, John, maybe could you speak to the cadence of comps as 3Q progressed? What do you think drove the magnitude of deceleration in November? Maybe if you could just touch on transactions versus baskets. or by category, and how are you thinking about the remainder of the fourth quarter?

Yeah, hey, Matt, this is Jay, and I can speak to some of those metrics, and John will chime in as well. You know, but the third quarter was a great quarter. We saw a very strong performance in the first two months, August, September, you know, probably in the high teens, close to 20% comps, and then, like we talked about in October, we had some moderation in that. And part of that, a large part of that was driven by a shift in a promotional calendar. Our mailer went out one week later, year over year. So that was an impact in October. And then, you know, obviously we've talked about, we've disclosed what the trend is so far for this quarter. And, you know, there's a few factors at play there. Certainly the cold weather, you know, the lack of cold weather is not helping us And also we think, you know, we kind of stick to our roots in terms of the door busters on Black Friday, and we know the other retailers really spread that out over the course of the month. So we think those are the biggest drivers. But we feel very positive with where we are now and really ready for the rest of the holiday season, which is big for us. And with that, I'll let John add some comments.

Yeah, Matt, I think Jay is spot on with that. The one takeaway I would tell you is, We do believe that we are locked and loaded for the remaining holiday period, and we think we're in a good position to capitalize on it. So we feel good where we're sitting right now, and I think that the timing of how the Black Friday ads were run by the big box retailers had some impact on us. Cold weather definitely hit our outerwear apparel and obviously our heater sales. So we're locked and loaded with those. I think we'll come out of it pretty good for the remainder of the quarter.

Okay, great. And then maybe a follow-up on gross margin. Could you just quantify merchandise margin expansion in the third quarter, and how best to think about gross margin in the fourth quarter relative to the 60 basis points expansion that we saw in the third quarter?

Yeah, in the third quarter, we were 60 basis points higher year over year, and 90 basis points of that was improvement on the merchandise margin side. So, you know, I think, and Matt, I think you were asking about Q4. I mean, we're not giving guidance, but certainly... You know, margin is the one thing that we've talked about before, kind of targeting that 40%. And this year, you know, we're going to shoot for that. I think we are experiencing pressure on the supply chain side, certainly with the transit, as well as on the labor front at our DCs. But we're still thinking that we're going to be in the ballpark of, you know, call it 39.8 to 40%. Great. Best of luck, guys. Thanks, Matt. Thanks, Matt.

Thank you. Our next question comes from the line of Scott Ciccarelli with RBC Capital Markets. Your line is now open.

Hey, guys. So before this year, you've had pretty steady SG&A dollars per store. Obviously, you incurred extra expenses this year, COVID, hazard pay, et cetera. As we kind of think about, you know, 21, should we, you know, kind of gear our models back to what we had been seeing in 2019, or is this kind of a step function increase in cost if you can just help us out with that piece.

Scott, this is Jay. Given the uncertainty, we're not talking about Q4. We're not really giving guidance for 21. But no, we expect to kind of get back to the normal SG&A going forward is how we would think about it. I mean, certainly there are some moving parts. With the premium pay, which we've incurred in Q3 and we would expect to continue at some level, we haven't made a determination about next year. I mean, there's lots of moving parts there. But I think on a normalized basis, generally speaking, if you look at 2019, I mean, we tend to be around 25% on a full-year basis. And we would expect, from a base modeling standpoint, to be in that arena, I would say. And obviously, sales going up or down impacts that.

Well, okay. And then just to follow up on Matt's question, can you remind us of the cadence of 4Q last year?

Of the comps?

Yes.

Yeah, I don't think we've disclosed that. We haven't really gotten into the cadence by month in a quarter. No. Okay.

The entire quarter has gotten to negative 4.9 for the quarter. Yep.

Got it. Thanks.

Thank you. Our next question comes from the line of Chani Luthra with Goldman Sachs. Your line is now open.

Hi. Thank you for taking my question. Could you give us some color on traffic and ticket trends in third quarter and how that has trended into fourth quarter?

Sure. I can talk about the third quarter. And like we said, I mean, we saw increases in both. It was really the 15.3% comp was driven by average basket, about 75% of the 15-3 was driven by average basket, and 25% was driven by an increase in transactions. And we're not gonna disclose the fourth quarter trends.

Got it. And then, could you perhaps give us an update on what you're seeing in the closeout pipeline? You've previously spoken about mega deals, you know. Are there any signs developing that robust mega deal environment should manifest as you sort of go into 2021? Or is there a possibility that demand is so robust everywhere that, you know, there are not really a lot of closeout deals out there to get to?

Yeah, I would tell you that I believe that regardless of the word mega deals that I put out before, The closeout industry is as robust as ever. Our merchants each and every day are collapsing on a lot of closeout deals. There is still a lot of, I'll call it, uncertainty in the marketplace. There's still a lot of deal flow out there. Bankruptcies have happened. There's a lot of excess inventory that has been canceled by other retailers. So the closeout environment is as robust as it's ever been. The mega deals... that I've talked about before. I think those will come in due time. I believe there's a lot of things happening right now where major manufacturers are producing to try to catch up with the demand, and they never get the timing right on there, so there will be excess inventory coming to us. It may not be as early as I had hoped, but I think it will be coming to us next year as well. So I feel very bullish on the closeout market. The merchants are having very much success on getting product for each and every one of our departments, so there's no real pockets that we're missing there. any inventory in or any deal flow. So we're very excited about where we're sitting today.

Great. Thank you.

Thank you.

Thank you. Our next question comes from the line of Randy Connick with Jefferies. Your line is now open.

Yeah, thanks a lot. So, Sean, any impact on the communication of Ali's Army week instead of day that may have kind of in performance of the business thus far in the current quarter in your view at all?

Randy, that's a great question. I'm not sure if it has or not, but we're giving the shoppers, you know, we're giving them, normally give them four hours and one evening to come to the store and it's a madhouse. And now we're going to give them a full week to shop. So it's possible. It's very possible. They're going to have seven full days now to use that coupon to get some pretty big discounts on toys and Christmas and also the rest of the store. So it is very possible. That's part of why we still feel very bullish on the back half of the quarter here. So there's a lot of volume to do. There's still three huge weekends to come. So recent trends would tell us that we feel very good, and we're seeing some nice responses here post-Black Friday. So I think we're locked and loaded and ready to go.

Perfect. And then as you think about your comments around the closeout industry being as good as it's ever been, And you saw merchandise margin expansion in the current quarter. How do we just think about just general merchandise margin opportunity, you know, go forward? I know it's obviously dependent on deal-by-deal basis, but just general, do you feel like you still have kind of room in that line item to kind of move to expand further? Just give us some thoughts there on holistically how you're thinking about it a little longer term.

Yeah, I think holistically we've built a model that we're always shooting for a 40-point gross margin. We're not looking to expand our margin. We always have the thought process that if we're doing better than the 40 points we normally give back to the consumer, we think building the brand and building the loyalty is more important. We have great operating margins with the 40% gross margin. So there's no need to expand that. If we can cover our impacts on the supply chain and still deliver a 40% gross margin to the shareholders, we're very, very pleased with that. So That's really how we manage the margin. It doesn't work out that way every single quarter, but that's what we shoot for on an annual basis.

Yeah, and Randy, this is Jay. Just to tack into that, I mean, you know, obviously this environment now and even next year is going to be a lot of uncertainty. But, you know, when we talk about longer term and we talk about the long-term algorithm of this business, it is fully intact. And, you know, it's very consistent with what we've always done. We expect that to continue. And in fact... You know, just overall positioning, we expect to get a lot of good deal flow. We've got a lot of good real estate deals. We are getting new customers right now. So we think all of that sets us up very well. You know, we're very excited about that in terms of delivering the long-term algorithm on a long-term basis.

Thanks. And just lastly, you know, it looks like the balance sheet is a war chest of cash. And, you know, look, you're in an enviable position with a lot of cash. It looks like your CapEx needs have gone down because we've gotten through the hump of the new distribution center expense. You know, how does the board think about proper cash cushion at this point? You know, just give a little flavor of how we should be thinking about just cash and, you know, when is enough cash enough at this point and what do you do with excess cash?

Yeah, Randy, this is Jay. And right now, And it's something we talk about with the board every quarter at our meetings, and it's a great problem to have building that cash. But right now, given the uncertainty in the environment and the pandemic, we think it's most prudent to remain conservative with our cash and remain liquid with that for a number of reasons to chase big deals, just to keep our flexibility. But as we get a little more certainty, in the environment and that cash continues to build, you know, what we talk about is doing stock buybacks in an opportunistic nature. And so I think when we are ready, and again, I think really we need the atmosphere around COVID and everything to settle a little bit. But once that happens, you know, that's when we'd get into the market from a stock buyback standpoint. We also have other capital needs, not immediate term, you know, but certainly we can lean into refreshing some of our stores. We've got a DC in a couple years on the horizon. So there are some other uses for cash in the relative near term.

And, Randy, we won't be afraid to put it to work if we need to. So it's there, and if we need to do something with it, we will.

Got it. Thanks, guys.

Thanks, Randy.

Thank you. Our next question comes from the line of Peter Keyes with Piper Sandler. Your line is now open.

Hi, thanks. Good afternoon, and thanks for taking the questions. First, on the closeout backdrop, John, there's certainly some chatter on Wall Street that maybe the closeout environment isn't really happening or it's really not all this cracked up to be that we thought a couple of months ago. And I guess there's observations that maybe some of the items at your stores or circulars just haven't changed that much. Could you just provide us maybe some more tangible examples of where you're excited, and maybe that's just calling out categories where you're seeing some elevated deals or even some specific products. That would be very helpful for us.

Yeah, Peter, I would tell you we don't feel that at all. We feel that the deal flow is as strong as ever, and I think that our assortment in our stores and the mix on our flyers is better than ever as well. I think we've given the consumer a lot of different opportunities this year than they might have had last year in different categories. And we see that with the sales because there are certain categories last year that were up that are down this year as we're moving things around and providing different assortment to the consumer. So I would tell you we're not seeing any pressure of getting goods. There's a couple pockets here and there that are consumable in nature that things are not readily available as they may have been last year. But that happens to us each and every year in the closeout sector. So we're used to dealing with that and working with it. But we're We're seeing a lot more opportunities in, I'll call it the mattress business or our furniture category. We're seeing deals in sporting goods. We're seeing scrapbooking deals. We're seeing additional children educational book deals come through. Candy's been real strong this year as well. So there's a lot of variety that's coming through the business. We've had some major deals on flooring, bed and bath. So there is not a shortage of opportunities out there for us at all. The merchants are continuing to push. They're bought correctly to our open-to-buy number, so we're excited where we're sitting, and the merchants are doing a great job sourcing product from existing vendors and new vendors. So we're seeing good flow across the entire board. I think the stores look a lot better than they have historically, Peter, and I know you're in the stores quite a bit, but we eliminated most all the top stock. in our stores so that you can actually walk through our stores and you can see from end to end. And I think that gives the customer a brighter shopping experience, and the stores are getting goods to the floor much faster than they have historically. So we're excited where we're sitting today.

Okay, that's helpful color, John. And then not to focus on the near term so much, but your stock is indicating down here in aftermarket, The slowdown in November, have you contemplated just the lack of an e-comm strategy as maybe this particular point in time also having a negative impact, and maybe that lack alleviates as we get through the holiday season?

Yeah, I think obviously our model is not an e-comm strategy model, so why there was an increased spike in COVID, and I'll call it spike number two, We definitely feel that there are some people who stayed away from the brick and mortars and shopped more online, but that's really not the field we play in. We do believe that's temporary in nature. It doesn't bother us all. I think we're positioned very, very well. We're learning a lot throughout this process, and our model is very resilient. So I think we've already started to see some trends pop back pretty well on us, and we think we're positioned well for the remainder part of the holiday. So I think it's very temporary in nature, and we're we're going to capitalize once again and the, the treasure hunt experience that we offer to the consumer, you can't duplicate that online.

Okay. Thanks a lot for all the color guys. Good luck with the rest of the holiday season. Thanks Peter. Thanks Peter.

Thank you. Our next question comes from the line of Brad Thomas with key bait and capital markets. Your line is now open.

Hi, thanks. Good afternoon. Um, first a question on inventory. Um, You all obviously have been chasing the business a bit here of late and seem in better position at the end of this quarter than you were after last quarter, but still feels like you didn't quite have inventory that you wanted. What categories were you seeing that in most when you were having trouble? And can you talk a little bit more, John? I think you talked about running a little bit leaner from an inventory standpoint going forward than you have. had in the past. Can you talk a little bit more about that decision? Thank you.

Sure. Brad, I would tell you I think that we were real, real close to being right where I wanted to be at the end of the third quarter. Up 2.5% seems light, but the prior year we were actually up 7% over the prior year. So I think we're positioned pretty well here. I'm sorry, we were up 15.9% last year. And that was, as Mark would say, that was real good with what we used to do. I don't believe we need to carry as much top stock in our buildings. I believe we had anywhere from $5, $6, $7 a square foot in a building on top stock that was not sellable in a box. That doesn't do a retailer any good at all to have inventory sitting there that's nonproductive at all. So when I took over, I mentioned that right away that I was trying to get more dry powder in the business and start to work with less inventory. COVID helped accomplish that much quicker than I thought we could. But I really think that us, after we cycled it, you know, we got to cycle the fourth quarter and the first quarter of next year that I would start to see us start to be pretty much flat year over year in inventory. Q2 might be up a little bit next year over where we ended this year because we were really caught by surprise on how much we did in comps with 43% comps. But I would think next year coming over, coming against Q3, I think we'd probably be 13%, 14% over with our store growth from this year. But I think we're right in line with where I'd like to see us in inventory. Could it be 4% versus 2.5%? Maybe. But it's so immaterial, it's not even worth the discussion. I think that all of our departments are in real good shape. We're not really missing any categories that relied in and missing business. We're right in line with our open to buy pretty much in every single category we have.

Great. And a follow-up, if I could, on the Ali's Army event. How are you thinking about the potential gross margin implications of having a promotional event running a whole week rather than one day?

Brad, it could be, depending on how well the event and how successful it is, it could be a big number. But I think we've got it baked into our expectations. I think we're okay. It's not going to be a real negative from what we're expecting to see for our overall fourth quarter.

Gotcha. Thanks so much, and good luck.

Thanks, Brad.

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.

Hey, guys. Thanks for taking my question. My first question, another short-term one on the quarter to date, and I guess the end of the Q3. Can you talk about is there a normal flow in early November or November for you over the past few years as it gets sort of pre-holiday earlier and earlier, and does this just match up similar to other ones? Was there anything in October that you saw as far as product changes or category changes that you know, that you could see some shift happening in consumer spend, that this was sort of coming?

No, I think October was, as Jay had mentioned earlier, was a little more self-inflicted. We actually ran our mailer one week less this year than last year, and that was by design, so that didn't help the end of the quarter out very much. And I do think there was a natural, we saw a natural slowdown even from Q2 into Q3. You know, the stimulus was running off and The lower income folks were running a little bit lighter on the money piece. So that started to tail in on us there. But I would say October was pretty much self-induced ourselves. November is a little hard to answer because last year was against prior year. We had a whole week shift of Thanksgiving. So there's not a real great cadence from 2019 to 2018. In 2018, we had the impact of the Toys R Us pandemic. events that took place, and we had a very, very robust 2018. So there's some shifts going on. But I would tell you our cadence this year is pretty normal to what we historically would do. I think the only difference this year that we've experienced is cold weather is a little bit later than it was last year. But most importantly, retailers acted differently this year than they did last year with trying to break up their Black Friday frenzy. and going out a little bit before the Black Friday holiday and putting out deals. I think that impacted us. We saw a bounce back right away after the Black Friday week, and we see some nice results coming in so far.

Okay. And then regarding fourth quarter, again, I know there's no guidance, but I want to, I guess, paraphrase, I think, what you've said and make sure it sounds reasonable. You know, you started quarter to date at the range you said, I think, mid-single-digit. but it sounds like you do expect it to strengthen based on some of the things that you're seeing. Is that fair?

Well, I would tell you we're not giving guidance for the fourth quarter. I think what we've seen so far, recent trends have been very good, but there's still a lot of uncertainty that we can't control. So what's out of my control, I cannot impact. But like I said, we're locked and loaded. Recent trends have told us that we're in a good position. So that's about as much color I can put on the fourth quarter for you.

Yep, that's fair. And then this is my other follow-up, and this also may be unanswerable around 2021 and planning expectations. And again, you know, we're not going to get magnitude or how you're thinking about it, but If you are planning to grow, I'd assume that, you know, the plans to purchase inventory, et cetera, need to be in place, right, in order to lap what you did. Lap is how flexible you can be, you know, whenever you finalize what that plan can look like in your business. If you're more flexible than a traditional retailer or a little bit less, and how do you think about that?

Yeah, I would say from a product procurement perspective, we're probably the most flexible retailer in the market. We have a flexible open-to-buy system. And the deal drives our decisions. So depending on where the deal is, we go to it. So this is what we do. We do it better than anybody in the marketplace. So I would tell you that that's what we're built for and how we're going to respond. We have holding capacity in our distribution center. So if the right deal comes and it's the right margin profile and the right desirability, we're going to collapse on it and we'll have it ready to sell to our customers when it's right.

Yeah, and I would just continue that. I mean, you know, we're excited about next year. I mean, there's a lot of uncertainty, but we've proven, you know, in these first three quarters this year that we can operate in this environment effectively and do it very well. We expect there to be even more opportunity on deals, on real estate. And obviously, right, we don't know what the consumer is going to do, but, you know, where they've been spending their money and, you know, it complements the departments we carry very well. We expect some of that to continue. Some of those will be trends that continue on, we think. So, yeah, we're excited about that.

Okay. Thanks, guys. Appreciate it. Good luck. Thank you.

Thank you. Our next question comes from the line of Rick Nelson with Stevens. Your line is now open.

Thanks. Good afternoon. Chuck, you talked about the areas of strength from a merchandise standpoint. Can you speak to the categories that haven't kept pace with those stronger

In Q3, Rick, the categories that were weakest for us were the electronics department, which was really impacted by us exiting the large appliance business. So that was 100% us and our decision. The next department was our clothing department, which was annualizing an athletic deal that we had. and then our outdoor outerwear clothing arriving a little bit later than we would ideally like to have it, which impacted the business. And then our last two categories, which we had already talked about in August and knew that would be a negative, was our patio furniture and our lawn and garden, because we sold all of that during Q2. So those were our lowest four performing departments. And as we said before, three-quarters of our departments were all positive. So that almost encapsulates all of our negative performing departments for you.

Great. Thanks for that. And curious if you're adding any new buyers as we look into 2021 and, you know, what categories, if you are bringing on new personnel, what categories they would target?

Yeah, Rick, we do plan on bringing on new merchants to the team next year. The way we go to market, we don't look for a specific category. We look for someone who culturally fits in the business and can learn the closeout industry that we operate in. There are very few buyers that even understand the closeout market, so there's a lot of training we have to do. So I would tell you we will look for the best person available, and then we will have them buy with their most capable of buying and move our people around if we have to. So we're not looking for a specific department per se. We are pretty full. in our departments, but we'll continue to build, like Mark would say, the minor leagues. We'll continue to hire the young people out of college and bring them in to get them trained, and we'll continue to develop our internal minor leagues so they can come up to the big leagues, and we're currently doing a very good job at that, and we're fully staffed with where we're going right now.

Great. Thanks, and good luck. Thanks, Rick.

Thank you. Our next question comes from the line of Paul Leduez with Citi. Your line is now open.

Hey, thanks, guys. I'm curious, if you look at the fourth quarter, how much of the quarter do you think is behind you from a sales volume perspective versus what you think you still have in front of you if you think about how prior years looked? Just some sort of approximation in terms of what November would typically represent of the whole quarter. Also, curious... If you can quantify the supply chain pressures, cost pressures that you saw in 3Q, how do you think about that in 4Q? And then I just wanted to go back to, you made a comment earlier, somebody did, about mega deals arriving later. I just wanted to understand what that was referring to. Thanks.

Yeah, let me take the mega deal concept first because I think I created a lot of confusion with that when I talked about it. We're getting plenty of large deals each and every day. We had talked about the mega deal concept of where there is a larger deal than what we could handle at one time. We'd have to store it and then sell it. Those are deals that are far and few between. That's not the item that moves our business. That's just a nice one to have when you get it. We're not sure if we're going to see those into next year, but we do believe that there's so much production going on with some of the manufacturing that we're going to see someone produce more than what they're going to be able to sell. and that will turn into a mega deal for us, and that will be something we're excited to see. But I don't have visibility on when that's coming and how that's coming. That's just something we know from our background and our history that would tell us that someone's going to overproduce trying to keep up with what they're doing right now.

Yeah, and Paul, this is Jay. I mean, we're not going to get into the bifurcation of November to the quarter. We just don't get that granular. And in terms of the supply chain headwinds, I mean, in the third quarter, you know, we probably had about – 30 basis points, I would say 20 to 30 basis points, you know, of impact from those increased rates and the pressure on the wages. I mean, it's just that it is a competitive time at DCs from a labor front, both from, you know, a pay standpoint and just the velocity and the workload that these guys are doing. So there's some turnover there. But the bigger impact really is on the rate on the inbound trucking as well as the inbound imports. costs. And we do expect those to continue into the fourth quarter. So again, that's why we had talked about a 40% gross margin on a full year basis. And the margins is the one area that we were pretty consistent on and we can talk about from not a guidance standpoint, but from an expectation standpoint maybe. And so we expect maybe now to be, we're going to shoot for the 40 and work hard to get there, but it's possible that slides by, call it 20 basis points and gets us closer to 39.8 to 40, which is actually a little better than what we had guided to initially when we started the year. Yeah, right, because that includes absorbing that third D.C. and Texas, which we know inherently has some headwinds to it.

Again, Paul, let me add a little bit of color on the sales. Obviously, we're not going to quantify the month of November to the overall quarter, but I will tell you that's a four-week month out of our 13 weeks for the quarter, so there's a lot of business to still be had for the remaining portion of the quarter. and our three biggest leaks are still ahead of us. So there's a lot of business for us to have, and we're locked and loaded, ready to go with it. Got it. Thank you. Good luck. Thanks, Paul. Thanks, Paul.

Thank you. Our next question comes from the line of Jeremy Hamblin with Peg Hallam Capital. Your line is now open.

Thanks. Jay, I wanted to first just ask a quick question. As we look forward to next year, roughly 50 new units, Can you give us a sense of the CapEx needs you had? You obviously made some investments in the D.C. in the past couple of years, but can you give us kind of a range on what you're thinking on CapEx with that level of... Yeah, I mean, we're in the process of rolling that up, but typically it runs about 2% of revenue, and I would expect it to be in that ballpark. Great. And then I want to revisit the three biggest weeks that you have remaining, and specifically the the Ali's Army Week. Thinking about the timing on that beginning, you know, December 13th, is there any risk in having it, you know, that late that because some of your competitors have pulled forward their deals and their Black Friday, you know, shopping promotions, you know, that the consumer has kind of spent it? Or do you like the setup that, you you know, at that point, most of the e-commerce shopping is going to be done and you've got a chance to kind of clean up the last, you know, kind of the last minute shoppers.

Yeah, Jeremy, that's how we kind of look at the strategy on what day we start. Normally, Ollie's Army is just a day. It's normally positioned intentionally right around this time period. So we don't want to do it too early in the season. We do it towards the latter part of the the holiday, and the Ollie's Army shopper that knows it and they know they're going to get 25% off all toys at Christmas, they wait for it, and it's a very powerful time period for us. I don't think online shopping or other retailers impact it because they know the pricing is already below the pricing in those stores, and to get 25% off that night, it's a big deal for them. So they normally will wait for that to happen.

Great. Thanks for taking the questions, guys. Good luck.

Thanks, Jeremy. Thank you.

Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is now open.

Hi, guys. Good afternoon. I wanted to ask you about inventory. If we just take a step back and we look at inventory turns, your turns historically have been pretty low relative to other retailers. Does that tell us that the WOW deals are responsible for a disproportionate amount of sales and Is that the market that we should be sort of focused on? I guess I'm asking you this question around the quality of deals versus quantity of deals, and how are you feeling about that aspect of the business today? I'm just hoping you can sort of put that all together for us.

I don't think our inventory levels have anything to do with either one of the two. I think the inventory levels is our strategic desire to reduce our overall inventory investment in the stores, as I said earlier, to give the shopper a better shopping experience in the store. When you have cartons on top of all your gondolas, I don't like that presentation. I never have. So I would tell you that it's more strategic than anything. I think the wow factor of our deals is as strong as ever. I mean, to do a 43 comp in Q2 and a 15-3 comp in Q3 when you're built off of a long-term algorithm of 1% to 2%, pretty exciting. I would tell you our merchants have done a phenomenal job to excite the consumer. and get them in the box. So the inventory, I don't want anyone to think that the inventory levels is by any means a lack of availability or lack of quality in the box. It's really strategically what we're trying to do. Our turn is still not going to be anything impressive. If we get to a three turn, that would be phenomenal. We're not looking to get to a four or five turn. We're kind of where we want to be. So for us to get to a three turn would be exceptional for us. And for most other retailers, that's not very impressive at all. So we're still a slow turn business. We're just doing a little bit of fine tuning to give us a little bit more operational efficiency in the store and hopefully a little better shopping experience for the consumer.

Yeah, and just to add a little bit of color to that, I mean, I think, you know, the other thing about the top stock is you can't sell that inventory when it's in a brown box on top of the shelf. So it's important to get that down and have it be sellable to the customer. And we've actually, the feedback we've gotten from people that walk our stores now when they're a little bit lighter is is the deals that we have actually present themselves much better. They actually kind of stand out. I mean, if Mark were here, he'd probably say we're still cluttered, maybe not as cluttered as he would like, but the deals on those shelves are a little bit cleaner and they stand out a little bit more. So we think it's really a win across all fronts.

Thank you. Our next question comes from the line of Jason Haas with BOA. Your line is now open.

Great. Thanks for taking my question. Can you talk more about the changes? Hey, can you talk more about the changes you're making in your digital marketing strategy? I know that your prices are on average much lower than your competition, but it seems like promotions have increasingly been an issue specifically around the holidays. So I wonder if maybe you're not getting credit for the value that you're offering consumers and if the genesis of of changing the digital marketing strategy or pushing more into digital is to, uh, to improve that.

Hey, Jason, is your question asking if there's more promotions done by others? So because of that, we're not getting the credit for our discounts.

Yeah, I guess I'm just, I'm just trying to kind of match up two different things. One is that in the past, I think we've heard less about promotions. I know like in 4Q last year, it was an issue with the toys. And now again, We're hearing about promotions from competitors being a potential issue. And then you're also changing up your marketing strategy. And I know that your prices are lower than your competitors because we've done the pricing checks. So I'm curious if it's maybe a messaging thing that you're just not getting the message out there that your deals are lower and maybe it needs to be more digital rather than just the flyers. But I'm curious your thoughts around that.

Yeah, Jason, that obviously is something that's a possibility. We've been print advertising almost exclusively for our entire lives. We're starting to, like we said, walk and test and experiment in the digital world, and we do think that that gives us the ability to reach a larger audience and reach an audience that is more of a lookalike to our current Ollie's Army membership through partnerships with Facebook, Instagram, Stitcher ads, and whatnot. We are starting to look at that. That's not something we've done very much of in 2020. It's something we'll start to walk a little bit faster in 2021, but our head of marketing has a lot of experience in this arena, and I think that will help us get our message out to other folks outside of the Army.

Thank you. Our next question comes from the line of Brian McNamara with Barenburg Capital Markets. Your line is now open.

All right.

Thank you for taking my question. First off, I was just – I was really impressed with you guys with your Q2 results, kind of saying you expected a slowdown in the back half. I'm curious where that slowdown landed relative to your expectations. It seemed like September and August were very good, and even October was pretty good, even though you had some self-inflicted issues there. And then, obviously, you had a big slowdown in November – But even the November is kind of where you guys have been historically. So I'm just curious, relative to your internal expectations, kind of how the year has shaped up, at least since your last report. Thank you.

Yeah, I would say on Q3, Brian, we were right in line with what we had expected to hit at. We were not disappointed whatsoever. So in theory, if we would have had one more week of that mailer out in October, we would have been probably a little bit ahead of our expectations there. with the overall business. And like I said, with November, we don't normally report intracorder, so it's a little hard to do that because there's so much business still left that we can make up a heck of a lot of ground. So coming out and giving the real number that we're at is potentially setting people up for a disappointment, and we may surprise everybody in the next seven, eight weeks of business here. So it's hard to do this, but with so much uncertainty with the pandemic, we can't just expect that things are going to be normal for the rest of the quarter. So the only data point we have is to give you what we've done so far. But I can tell you recent trends are very encouraging for us, and I think we're ready to go and we're locked and loaded.

And thank you for that. I just had a quick follow-up. This was kind of asked before, but I want to dig a little deeper on it. in terms of kind of building out the merchant team. It seems like your merchant team is kind of second to none, in my opinion, in this space. But it seems like it's kind of small relative, at least the senior merchants. And you had mentioned kind of maybe hiring the minor leaguers to put them up into the big leagues. I'm just curious how much thought has been put towards kind of really growing that senior merchant team just as you build the business? for the long term?

Well, we, in the last, Brian, I'd say in the last seven, eight years, we've really, really built that team out compared to where we were before. Even though we're a small team, I think one thing that differentiates us from most retailers, when you buy closeouts, you don't have as much analysis that takes place like other folks do when you buy everyday goods and you do unit plan ladders and you're planning by size and color and you have a lot more a planogram type of buying that takes place. Our buyers react to what's out in the marketplace. So you become a general expert in a category that you know you're basically, you know, our folks, we view them as business people, not necessarily a buyer and another retailer just buys the goods and move on. They never see the good. They never deal with the pricing of the goods. They don't deal with much of it once they buy it. Our merchants own it from the time they write the purchase order until it leaves the store. So it's a different model from that perspective. But we continue to invest in it because as we get bigger, there's more and more that we need to do and that we need to have more help for the merchant team. But we feel like we're well positioned. We're focusing on the senior buyers as well as we do need to bring more in, and we will do so. But we're currently staffed appropriately.

Thank you. Best of luck.

Thank you.

Thanks, Brian.

Thank you. There are no further questions at this time. I would now like to turn the call back over to John Swagger for closing remarks.

Thank you, Operator. Thanks, everyone, for your participation and continued support. I wish you a very happy and safe holiday season and look forward to sharing our fourth quarter results with you on our next earnings call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.