Ollie's Bargain Outlet Holdings, Inc.

Good afternoon and welcome to OLLI's Bargain Outlet conference call to discuss financial results for the third quarter of fiscal 2021. Currently, all participants are in 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. And as a reminder, this call is being recorded. On today's call... From management, we have John Swigert, President and Chief Executive Officer, Jay Stass, Senior Vice President and Chief Financial Officer, and Eric Vandervlok, Executive Vice President and Chief Operating Officer. I will now turn the call over to Jean Ponta, Investor Relations at ICR, to get started. Please go ahead, ma'am.

Thank you. Good afternoon, and welcome to Ali's third quarter conference call. A press release covering the company's 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 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 maturely from those mentioned on today's call. Any such items, including with respect to our future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements. We 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 is the most closely comparable gap financial measures to the non-gap financial measures included in our earnings. With that, I'll turn the call over to John.

Thanks, Jean, and hello, everyone. Thanks for joining our call today. While this was a very challenging and difficult quarter, we remain bullish on the long-term opportunities ahead of us. Looking back on the third quarter, sales and operating performance was primarily impacted by greater than expected supply chain-related headwinds, leading to results below our expectations. These headwinds included shipping delays of imported seasonal product into our supply chain network, which in turn created backlogs in our distribution centers, causing delays in shipping the right product to the stores in a timely fashion. We also believe that the sudden rise in inflation had an outsized impact on a portion of our customers who mostly live on a fixed income. While I'm extremely proud of our team's efforts through these challenging times, we were unable to overcome these headwinds during the quarter. For the third quarter, comparable store sales decreased 15.5% compared to a 15.3% increase last year. Compared to 2019, our comparable store sales decreased 1.3%. While we are disappointed with these results, we remain as confident as ever in our business model and believe that many of the factors impacting us right now are transitory in nature. So let me discuss what opportunities we see. First, we remain very excited about the incredible deals being presented to us each and every day, and we expect to see even more deals related to order cancellations and abandoned goods associated with import shipping delays. Second, we have made meaningful progress in driving improved efficiencies and increased throughput across our distribution centers. And third, we provide exceptional value to our customers, which we believe will benefit our business as this highly inflationary period continues and consumers trade down. Now, let me address each of these opportunities in more detail, beginning with the supply chain. During the third quarter, we were impacted by later-than-expected deliveries in certain categories, including our key seasonal offerings such as toys, Christmas, and heaters. This was due to supply chain challenges related to the reduced availability of shipping containers, capacity constraints, and port congestion. Moving forward, we expect to see incremental deals from delayed shipments that are canceled or abandoned and available at this disruption as this disruption is what we are designed to capitalize on. We see closeout opportunities generated in a number of ways ranging from excess inventory, overruns, canceled orders, package changes, product innovation, and bankruptcies. During inflationary times, we see companies take measures to offset higher costs such as resizing of packages, which also creates great deal opportunities for us. I stated at the beginning of COVID that market disruption creates opportunities and deal flow for Ollie's. The current environment plays into our strengths, and we are pleased that we continue to see exciting opportunities. Second, while we have made great progress in driving increased throughput in our distribution centers, it took longer than anticipated to return to optimal levels with all the supply chain challenges in the marketplace. The delays and receipts of our imports led to timing issues for our DCs, forcing us to push out some of our closeout deals to make room for the imports that were late arriving. In addition, the low visibility into the timing of deliveries made it difficult to include our best deals in our advertised flyers. Therefore, our flyers did not reflect certain items that typically drive excitement in our stores. In our distribution centers, we implemented changes to our processes as well as leadership and saw significant improvements throughout in throughput as the quarter progressed. Despite the supply chain challenges, we were pleased to have achieved vastly improved throughput levels by the end of the quarter. Our Pennsylvania and Georgia distribution centers are operating at desired throughput levels to meet our needs, although we still have more work to do at our newer Texas DC. Importantly, we're very close to hitting our throughput goals. While human capital remains a challenge, we have worked to improve our hiring process as well as made investments in our workforce to attract and retain quality associates. We are pleased to share we have made the decision to expand our Pennsylvania distribution center by 200,000 square feet, enabling us to service approximately 50 additional stores for a total of 200 to 210 stores. We ended the quarter with inventory up 19% compared to last year. This increase was in part due to heavier receipts near the end of the quarter and in transit import product. We are pleased with both the current quantity and quality of our inventory in most of our stores today. However, there are still opportunities in stores which are serviced by our Texas DC, as I spoke to previously. In addition to supply chain related headwinds, we believe that inflation in food, gas, services, and other necessities is creating financial pressure on our lower income customer base, reducing their discretionary dollars. Since a portion of our customers are on a fixed income and need to stretch their dollar further, we believe this is having an outsized impact on our business as customers are allocating a higher percentage of their income to fuel and grocery expenses. With that said, we have historically seen that our extreme value offerings appeal to a broader base of consumers in periods of economic uncertainty, which we believe creates opportunity for us to capture new customers longer term. In addition, we will opportunistically raise prices while maintaining our strong value proposition. Ali's Army continued to be a key driver of our sales in the quarter. The Army increased almost 10% over the prior year, ending the period with 12.5 million active members. Once again, we saw nearly 80% of our sales penetration in the quarter, matching last year's historical high. Sorry, last quarter's historical high. One of our biggest events of the year, Ollie's Army Night, is Sunday, December 12th, and we are excited once again to open our doors exclusively to Ollie's Army members for an evening of shopping and special discounts. Our stores will be packed with toys and seasonal product in addition to our other great deals, and our teams are eager to welcome our most loyal bargainauts. If you are an Ollie's Army member, we hope to see you there. If not, there's still time to enlist in the Army now and join us for a great night of deals and excitement. In terms of marketing, we continue to evolve our marketing strategy to incorporate a digital component to attract new customers, enhance our brand awareness while maintaining our connection with our most loyal customers. We plan to increase our marketing spend next year to increase brand awareness as we continue to expand our store base. Turning to real estate, during the third quarter, we opened 18 stores, including our first in Illinois, the fourth new state we entered this year. We have opened 45 new stores year to date, bringing us to a current total of 430 stores in 29 states, with one additional opening planned for later in January. While new stores have likely been impacted by the same dynamics as our current store base, we remain pleased with the productivity level of our new stores overall. New stores are ultimately the engine of our sales growth, and we plan to open between 50 to 55 stores annually on a go-forward basis and believe that our model can support 1,050 stores in total. While the supply chain issues are likely impacting us in the short term, we remain as confident as ever in our business model and a long-term growth outlook. Quarter to date, comparable store sales trends are down low single digits compared to 2019. While we have received more of our seasonal products during the fourth quarter, it arrived later than expected, causing us to miss out on the early holiday selling season. Based on this, we expect comparable store sales to be down 2% to flat compared to fourth quarter of 2019. As we look past 2021, we are confident that we will continue to grow well into the future with a significant white space in front of us and deliver strong growth in both our top and bottom lines as we have for almost 40 years. Reflecting confidence in our business, we are pleased to announce the Board has authorized an additional $200 million share repurchase program. In summary, we are a high-growth company and one of the most attractive sectors in retail, extreme value, and we believe we have the scale, the know-how, and the relationships to benefit from the continued disruption in the marketplace. We have tremendous runway to expand our footprint, and we believe the value proposition of our business model supports our long-term growth plans. And finally, I want to thank our over 10,000 team members for all they do to serve our customers and communities and support each other during these challenging times. As we say, we are Ollie's. I will now hand the call over to Jay to take you through our financial results.