Ollie's Bargain Outlet Holdings, Inc.

Good morning and welcome to OLLI's Bargain Outlets conference call to discuss financial results for the third quarter fiscal 2023. Currently, all participants are in a listen-only mode. Later, we will conduct a question and answer session and 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 the express written authorization of OLLI. Joining us today, call from OLLI's management are John Swigert, President and Chief Executive Officer, Eric VanderValk, Executive Vice President and Chief Operating Officer, and Rob Helm, Senior Vice President and Chief Financial Officer. Certain comments made today may constitute forward-looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our Fiscal 2022 Form 10-K, dated March 24, 2023, and Fiscal 2023 periodic reports on file with the SEC and the earnings press release. Forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update these statements. On today's call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings press release. With that said, I will now turn the call over to Mr. Swigert. Please go ahead, sir.

Thank you, and good morning, everyone. We appreciate you joining our call today. We had another strong quarter and are pleased with the positive trends in our business. Our third quarter sales and margins came in ahead of our expectations, driven by strong deal flow, lower supply chain costs, and continued execution throughout the organization. In the quarter, comparable store sales increased 7%, net sales increased 14.8% to $480 million, and adjusted EBITDA increased 29.5% to $51 million. We also opened a record 23 new stores in the quarter and saw very healthy new store productivity in the period. Based on the strength of our third quarter results and current business trends, we are raising our sales and earnings guidance for the full year. The third quarter represents our sixth consecutive quarter of positive comparable store sales growth, and we continue to see broad-based strength across numerous categories. In the quarter, over 60% of our product categories comp positive, with our top performers being candy, sporting goods, housewares, food, and toys. Our summer seasonal categories such as room air and summer furniture also contributed to our strong performance. The closeout deal flow is very strong. Consumers remain under pressure and are looking for ways to save money on branded merchandise they need and want in their homes. Manufacturers are creating new and innovative products, changing packaging and sizes, and competing for retail shelf space. which is all creating more close-out opportunities. We're built for this environment. For over 41 years, Ollie's has been selling brand-name products at drastically reduced prices, which are 20% to 70% below traditional retailers. We are a trusted source with both our customers and vendor partners. Customers know they can find real brands and real bargains on products they need and use in their lives every day. Our vendors know we are a one-stop shop for managing excess inventory and closeouts. With over 500 stores and growing, our size and scale is becoming a real competitive advantage and we are seeing better access to deals across a growing number of categories and vendors. Our deal pipeline remains very strong. Deals drive our business and execution drives our success. The pandemic disrupted our execution in many ways, and we have spent the last couple of years investing in our people, supply chain, distribution centers, stores, and marketing. We are executing better across the business, and this is driving productivity gains throughout the organization. Eric will speak to some of these in a moment. Ollie's Army continues to be another bright spot, with membership up almost 5% year-over-year and accounting for over 80% of our sales in the quarter. Our busiest and most exciting night of the year, Ollie's Army Night, is this Sunday, December 10th. This is our way of saying thank you to our best and most loyal customers and giving them something special. Our stores are loaded with great deals, and our teams are ready to welcome our loyal bargainauts. If you are an Ollie's Army member, we hope to see you there. If not, there is still time to enlist and share in the fun and special savings. To wrap it up, we are pleased with our third quarter results and the continued momentum in our business. We are executing across the board, buying great deals, managing our supply chain, opening new stores, and controlling our cost. We are well positioned to continue growing and scaling the business and remain confident with our ability to deliver against our long-term growth targets of double-digit sales growth, 40% gross margin, and double-digit EBITDA growth. Now, let me pass the call over to Eric to discuss our store growth and operating initiatives.

Thanks, John, and good morning, everyone. Our results this quarter reflect the strength of our deals, the hard work and commitment of our incredibly talented team, and our efforts to improve execution across the organization. Process improvements and investments we have made in our people, supply chain, and stores are driving better productivity and execution. The most important pillar of our long-term strategy is store growth. In the third quarter, we opened 23 stores. This is a record number of openings in a quarter for Ollie's. We are also excited to report we surpassed the 500-store milestone and expanded into another state, ending the quarter with 505 stores in 30 states. We have already opened another five stores in the fourth quarter, including our first store in Long Island, New York. This puts us at 43 new stores this fiscal year, with two additional stores planned to open later this quarter. Turning to remodels, our customers deserve an updated shopping experience that better showcases the amazing deals we offer in an organized and easy to navigate store format. We completed 12 stores during the quarter, bringing us to 26 stores through the first three quarters. We are on track to complete approximately 35 remodels this year. Moving to marketing, we continue to look for innovative ways to enhance and expand our marketing efforts. We are pleased with the performance of our streamlined flyer, which we believe better showcases our most compelling deals. During the quarter, we shifted one flyer out of the third quarter and into the fourth as planned. We continue to broaden our reach and build our brand awareness through other forms of marketing. We executed a campaign around National Bargain Hunting Week, which included a survey as well as a media tour with lifestyle expert and influencer Lamor Suss. This campaign generated over 500 million impressions. We're continuing to build on our success and have expanded the program to include over 50 influencers. The growth of our social media marketing program helps keep OLLI's message of savings top of mind with existing customers and attracts new customers as well. This is helping fuel our growth, especially with the younger customer demographic, which is our fastest growing segment. Our collective marketing efforts led to a nice improvement in OLLI's Army growth this quarter. The customer file increased 4.8% year over year, and sales from the Army representing over 80% of our sales. We are encouraged to see that our compelling deals and enhanced marketing programs are attracting younger customers to the Army. We also implemented a military appreciation discount day for all Always Army members who are veterans or active duty military. Turning to supply chain, we continue to expand our distribution network to support our growth and are on track to open our fourth distribution center in Illinois in fiscal 2024. This will provide us the capacity to service an additional 150 to 175 stores as we expand into the Midwest. The expansion of our Pennsylvania distribution center was completed in August, and we are seeing immediate benefits in throughput and operating efficiency. These combined investments give us the ability to service between 700 and 750 stores in support of our long-term target of 1,050 stores or more. Before I turn the call over to Robert, I would like to take a moment to thank our amazing associates who are value obsessed and committed to the successful growth of our company. I am super proud of the excellent teamwork we continue to demonstrate each and every day in the execution of our business. Rob?

Thanks, Eric, and good morning, everyone. We are very pleased with our third quarter results, which came in ahead of our expectations. We delivered better than expected comp sales and flow through to the bottom line. With the strength of the third quarter and continued momentum in our business, we are raising our sales and earnings guidance for the full year. In the third quarter, net sales increased 14.8% to $480 million, driven by a 7% increase in comparable store sales and new store unit growth. Our comp store sales growth was driven primarily by transactions, and as John indicated, over 60% of our product categories comp positive in the quarter. Ali's Army increased 4.8% to 13.7 million members, and sales to the Army represented over 80% of total sales. During the quarter, we opened 23 new stores, ending with 500 new stores in 30 states, an increase year over year of 9.1%. Our new store productivity was very strong in the quarter, and our new stores continue to perform above our expectations across both new and existing markets. Gross margin improved 100 basis points to 40.4% compared to last year, primarily driven by favorable supply chain costs, slightly offset by higher shrink in merchandise mix. Gross margin was ahead of our expectations for this quarter, and the outperformance was primarily driven by strong deal flow. SG&A expenses as a percentage in net sales leveraged 40 basis points to 29.5%, driven by the leverage of fixed expenses on the increase in comparable store sales, even after taking into account the impact of higher incentive compensation costs year over year. Operating income increased 32.3% to $39 million, and operating margin increased 100 basis points to 8.1% in the quarter. Adjusted net income increased 37.4% to $32 million, and adjusted earnings per share was 51 cents compared to 37 cents last year. Adjusted EBITDA increased 29.5% to $51 million, and adjusted EBITDA margin increased 120 basis points to 10.6% for the quarter. Turning to the balance sheet, our cash position remains strong, with $264 million between cash on hand and short-term investments, and no outstanding borrowings under our revolving credit facility. Inventories increased 2% to $532 million, primarily driven by new store growth, partially offset by the benefit of lower capitalized freight costs. Adjusting for these items, our inventory increased 5%. Capital expenditures totaled $36 million in the quarter and were primarily for the development of new stores, remodeling of existing stores, the completion of the company's distribution center expansion in York, Pennsylvania, and the construction of our new distribution center in Illinois. During the quarter, we bought back 143,000 shares of common stock for a total of $11 million. At the end of the quarter, we had 98 million remaining on our current share repurchase authorization. which the board approved extending to March of 2026. We are committed to returning capital to our investors through share repurchases while balancing our strategic growth opportunities and working capital needs. Turning to our outlook for the full year, based on our strong third quarter results and current trends in the business, we're raising both our sales and earnings outlook for fiscal 2023. We are entering the fourth quarter with momentum in our business and are confident in our ability to execute. With a lot of business still ahead of us, including Ali's Army Night, we believe that we are well positioned to deliver great deals to our customers. We do start to come up against more difficult comparisons in the fourth quarter, and we'll continue to take a measured approach to setting expectations. For the full year, which includes the 53rd week, we now expect total net sales of 2.097 to 2.104 billion comparable store sales growth of 5.3 to 5.6 percent, the opening of 45 new stores less one closure, gross margin in the range of 39.2 to 39.3 percent, operating income of 221 to 225 million, adjusted net income of 172 to 176 million, and adjusted net income for diluted share of $2.77 to $2.83. an annual effective tax rate of 25.2%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately $62 million, and capital expenditures of approximately $125 million, including $75 million for the construction of our fourth distribution center and the expansion of our Pennsylvania distribution center. Lastly, let me provide a few comments on our fourth quarter expectations. We are raising our Q4 comp sales expectation to approximately 3%. This takes into account the shift of one flyer into the fourth quarter from the third. We expect to open seven new stores in the fourth quarter, although there is one store that is currently scheduled to open in late January that could fall into early February. Now, let me turn the call back over to John.

Thanks, Rob. Over the past 41 years, our team has grown to over 12,000 team members who are working harder than ever. The holiday season places extra demands on our team members, and I thank them for all their hard work and dedication. It is the combined experience, passion, and commitment of the entire team that makes OLLI special. I am grateful for our team and all that you do each and every day. As we say, we are OLLI. That concludes our prepared remarks, and we are now happy to take your questions. Operator?

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please stand by while we compile the Q&A roster. And one moment for our first question. Our first question will be coming from Brad Thomas of KeyBank Capital Markets. Your line is open, Brad.

Hi, good morning, and congratulations on the nice quarter here. Thanks, Brad. John, my question. Absolutely. Well deserved. Well, my question is really around, you know, how you're thinking about same store sales for 2024. You know, you've long had the algorithm of sort of a one to 2% comp. But if we go back, I think these last two quarters, I mean, they really stand out. You know, you had the pandemic period, you had the K-cup period, if you go back about a decade ago. I mean, these will prove to be some tough comparisons next year. How are you thinking at this point about same store sales for next year?

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

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

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

Really helpful. Thanks so much.

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

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

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

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

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

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

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

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

Yeah, Kate, obviously we called out the strong categories on the call. The categories that we would say were underperformers would not be a surprise, I think, to the overall market. Our underperformers in the quarter were furniture, domestics, and clothing. Most all that's discretionary in nature or seasonally driven in nature with what we're seeing. I would tell you going into Q4, two of those three categories are no longer the underperforming category. So we've definitely seen some turnarounds in the domestics and clothing arena going into Q4. Furniture is something we have made a concerted effort to reduce. In the last couple of years, there's just not high demand for it. Biggest furniture category is really in the mattresses, and that's something that we're still in. But most others, we've really de-emphasized the furniture category intentionally.

Thank you. And one moment for our next question. And our next question will come from Edward Kelly of Wells Fargo. Your line is open, Edward.

Hi. Good morning, everybody. A question I have for you on just promotional cadence in Q3. I believe there was a 15% off coupon that you didn't run early in addition to the flyer that shifted. So I'm curious if the impact overall was bigger than the 1% hit that you had talked about And then as we think about Q4, that flyer shifts in. So do you still think that's 100 basis points based upon what you saw? And then what about any other couponing or sort of promotional considerations that we should be thinking about?

Hi, Ed. It's Eric. I'll take the question. I think maybe in reverse order, the ad shift print and digital were primarily driven by the print dates. It met our expectations shifting out of Q3 into Q4, so we're expecting that shift to be, as you said, approximately 100 basis points into Q4. In terms of promotions in general, whether coupon or other promotions, we run coupon promotions from time to time, although We're not promotional in nature. We're not a high-low retailer. We do run promotions, as you've mentioned, from time to time, and it's not an exact science. We look at a number of factors, including variances in the way the calendar falls, timing of holidays. For example, there's an extra Saturday or meaningful weekend in this Christmas season, holiday season in front of us, business needs or inventory content and kind of where we stand, and we make decisions tactical, sometimes in the moment, to promote based on all of those factors. We have no plans to run any additional promotions this year at this point.

Got it. Okay. Oh, go ahead. I'm sorry.

No, go ahead. Sorry.

Okay. And then just holiday in general, I was curious if you could maybe talk about the product offering that you have lined up. What are you seeing so far in terms of consumer response, demand, especially as it pertains to post-Thanksgiving at this point? And I guess how does current trends sort of line up with the comp guide that you've got laid out for us?

Yeah, Ed, there's obviously, you know, there's still a lot of business to do between today and December 24th. One of our biggest days of the year is this coming Sunday. So we tell you we feel good where we're sitting today. Trends are in line with where we want to be at. So we're very excited what we've seen from the consumer response perspective. There's definitely a little uncertainty out there in the marketplace with consumer and the demand, but I believe our values are winning today. and the customers are responding to our values that we're providing to them. So there's a longer shopping period that we're dealing with as well. So we've got a lot to go. We feel good we're positioned. Our offerings are strong, and we'll see where it lands out for the end of the season.

Could I just piece one more in on SG&A? Could you quantify incentive comp for the quarter, and then what's the drag on that going to be in Q4? Sure.

Sure. This is Rob. Incentive comp was about 50 basis points of a headwind to the fourth quarter. So if you factor that in with the 40 basis points of leverage we showed in the financials, we would have gotten 90 basis points of leverage this quarter with the seven comp, which we were pretty pleased with. For the fourth quarter, it's about a 60 basis point headwind, and we've included that consideration in our guidance. Great.

Thank you, guys.

Thanks, Ed. Thanks, Ed.

And one moment for our next question. Our next question will come from Jason Hawes of Bank of America. Your line's open.

Great. Good morning, and thanks for taking my questions. I'm curious if you could talk about some of the improvements that you've made to the business over the past year or so in order to better capitalize on this environment where folks are searching for value. So I'm curious in terms of like supply chain and store operations, if you could just talk about some of the projects you've been working on there.

Sure, Jason. We've been continuing to work on improvement in productivity in the supply chain and in stores, various ways, investing in process change, as well as some lighter investments in systems. and in people to ensure that we can execute, ensure that we're consistently executing with a strong foundation. We also made a change, as you're aware, to our ads where we're now advertising fewer items in ads, and I spoke about it a little bit earlier. That's working out quite well. It's driving traffic, and it's reducing complexity and the amount of product we need to move through the pipeline to hit a specific date for an ad break. So that's been a nice improvement as well. We do continue to invest in our DCs and material handling equipment to improve productivity, semi-automation that's very market-established. as well. And then we've talked a lot over the last two years about transportation, so I won't dwell on transportation. We've made some structural changes, especially in international transportation, to how we approach the market and how we contract for freight. So we'll go into that in a lot of detail, but that was a pretty big breakthrough for us at kind of the peak of the chaos in the international transportation world. We do continue to have opportunities as we move into next year. to enhance productivity, become more efficient, and we'll continue to invest. On the store side in particular, the way in which we move product from the truck to the floor has been a focus of attention moving into next year.

It's very color, really helpful. Thank you. And then as a follow up, you mentioned that you recently opened a store in Long Island. Recognize that one. I don't know if it's far out in Long Island or not, but curious if you are starting to open stores in higher cost locations. And if so, if that changes how you're thinking about that long term, you know, 1050 store target, if there can potentially be upside. And then I guess also how those new stores are performing in these, you know, if you are going to some higher cost locations.

Sure. I'll take that, Jason. Long Island loves Ali. So Selden, New York is where we opened the store. It's off to a great start. We love Long Island. They love us. So I think the question about long term, we have contemplated some high cost market stores in our 1050 store target. So that's already contemplated there. So we need the economics to work, but we don't necessarily kind of blindly look at household income as a driver of whether or not a customer is going to like Ollie's. We've seen a trade down in higher income customers that's meaningful. So that's encouraging, especially over $100,000 in household income. And then when you look at a place like Long Island, discretionary income becomes a factor as well as the cost of living is also very high. There's maybe a lower discretionary income and customers love, love, love discount retail on Long Island as a result. So we consider that as well.

I think, Jason, just one takeaway from it. There's definitely not a strategic change to our store growth philosophy, but there was an opportunity there that worked for our model when we took it. So we'll continue to be opportunistic. But strategically, there's been no change on how we're going to open stores going forward.

Yeah, I think John makes a good point. Our real estate strategy is opportunistic in nature. So when we have opportunities to open stores that make sense, whether high cost or rural, you know, we look at them. We consider them and we, a lot of qualitative attributes around the store to consider. And if it all adds up, we open the store.

Got it. That's helpful. Thank you.

Thanks, Jason.

One moment for our next question. Our next question will come from Eric Cohen of Gordon Haskett. Your line's open.

Hi, good morning. Great quarter, guys. You commented earlier in the call that your company can get back to an on-algo comp for next year. I'm just curious, as the company gets bigger and bigger and you guys have a lot of momentum, do you have to change the way you approve deals and the deals you accept since you're going to need larger, bigger deals to continue to grow as the business scales?

Eric, we've been doing this for a long time, and closeouts are closeouts, and we do not have any hard, fast rule on the size of the deal. If it's a small deal and it works and it's the right value for our customer, the right margin for our profile, we're not afraid to buy it and put it into just one specific region. We look at everything, and there's no set hard, fast rule where our merchants say no to the size of a deal.

Great. And this is typically you guys have said 50% of categories count positive. This is another quarter where more than 50% have counted positive. Is this a reflection of the improved value proposition, any change in consumer spending in terms of trading down, or is this just better execution and deal flow from you guys?

I would say it's probably all of the above. I think the deal flow has been strong. The offerings we've had in our stores have been strong. The customer's been responding. There's definitely been a trade down and there's a need for value more so today than there has been. So I think that's just our offerings are resonating with the consumer.

I appreciate it.

Thanks, Eric.

And one moment for our next question. Our next question will come from Jeremy Hamlin of Craig Halem Capital Group. Your line's open.

Thanks, and I'll add my congratulations on the strong results. In terms of capital plans and investment for next year, you have obviously the new DC. I think you indicated 35 remodels for 23, and just wanted to get a sense, it sounds like you're on track for 50, kind of your 50 to 55 new unit openings next year. I wanted to confirm that one and then also just get a sense on the remodels, which sound like they're going well. Should we expect a similar type of number for 2024?

Hey, Jeremy, this is Rob. I'll take a couple pieces of that multi-part question, and Eric will take a couple. From a capital planning perspective, we typically, from an on-algo perspective, would plan for 2% to 2.5% of sales as our capital plan. For next year, we do have the carry-in of the completion of the fourth distribution center that would increase that number. I would say, you know, without giving guidance for next year, I would say, you know, probably in the range of $75 million for next year just with the carryover from remodels and new store units. I'll hand it off to Eric. Thanks, Rob. Jeremy, it's

The remodel program, it's less about how many, it's more about maximizing the effectiveness, enrolling the best improvements that we're making to these stores into the rest of the chain, as well as influencing our new store design and tweaking our new store design as we're going forward. With that said, we're expecting to remodel approximately the same number of stores next year, approximately. Again, to Rob's point, not giving guidance at this point. Tying into capital, they're relatively light from a capital standpoint. The total investment is between $125,000 and $200,000, so it doesn't add up to particularly material numbers, percentage of overall capital spend, low cost, relatively quick paybacks.

Got it. And then just switching gears to you had some interesting color on some of your marketing plans and how that's developing more use of, you know, social media and influencers. I wanted to see if you could elaborate on that. And I think you also noted that, you know, younger customers were your fastest growing segment. I wanted to see if you could you know, clarify the age range that you're talking about and just potentially expand on, you know, what the company's plans are in terms of those marketing efforts to continue to expand your army.

Sure, Jeremy. I guess kind of a retrospective on marketing, Several years ago, we spent almost nothing in digital channels. It's about as close to zero as you can get. Now, several years later, it's over a third of our overall marketing spend, so it's very, very meaningful. We hired a marketing expert as well who really knew digital, Tom Kuypers, to the team several years ago, and he's really accelerated, propelled our investments in digital over the last several years. A large percentage of that investment is in social media channels, meta channels, Facebook and Insta. We have a strategic relationship with Google now. And with YouTube, we're on TikTok. The influencer program, you know, over 50 now that we're working with mostly nano micro influencers. We think authenticity is really critical with influencers. So we look for people that are already talking about us and then give them incentive to talk about us more. So, you know, we continue to test in every available digital channel to see what's most effective and And to your point, it does look like it's producing results in growth of younger customers. In terms of defining the age of a younger customer, we're seeing strength in the under 45-year-old customer, so call it 18 to 45, as well as the 45 to 55-year-old customer. We have a large percentage of customers that are over 55, which are indexing slightly down, and cohorts below 45 are indexing up, and we see very positive momentum there.

Great. Thanks so much for all that color. Best wishes. Thanks, Jeremy.

One moment for our next question. Our next question will come from Matthew Balls of J.P. Morgan. Your line is open.

Great, thanks, and congrats on a nice quarter. Thanks, Matt. So, John, maybe larger picture, at 1% to 2% same-store sales, what do you think is the right operating margin, maybe longer term for the business, or how best to think about a bottom-line annual growth algorithm with the business returning to that 1% to 2% historical trajectory going forward?

Yeah, I think, Matt, the 1% to 2% comp long-term algo, the operating income will be definitely compressed from our all-time high, if you look at 2019 per se. We have increased costs now in the SG&A world that are permanent in nature. I think we used to be probably close to 25.3% SG&A ratio. It's probably closer to mid-26s now, so probably about 100 basis point loss in overall operating income. So I would say that you probably see that on a carrying forward long-term basis. As we go, you might get 10 bps here and there, but not much more than that on a significant basis. So I think that with the top-line growth and the the margin of 40 points, we should be able to still be able to maintain double-digit EBITDA growth every year for the foreseeable future.

Great. And then maybe, Rob, just to follow up on the gross margin, any puts and takes in the fourth quarter just to consider? And then as we think about the spread in terms of your values in the marketplace today, Is 40% a multi-year gross margin ceiling, or do you think there's any opportunity there to potentially press that a bit higher?

I'll take the first part of the question, and I'll hand it off to John on the second part of the question in terms of the longer-term outlook on gross margin. From a Q4 perspective, we'd expect for Q4 gross margin to expand from last year. We are expecting benefits in supply chain costs Probably in the range of what we saw this quarter. So, you know, as a reminder, you know, the fourth quarter is always a little bit lower than the third quarter in terms of gross margin because the promotional cadence and how the Ollie's Army Night indexes into the quarter. But we'd expect a similar type gross margin, strong gross margin performance in the fourth quarter.

Yeah, Matt, with regards to the overall, I'll call it the long-term performance, We do view the value as key and value as paramount, and we've always focused on giving back to the consumer once we hit 40%. We're going to continue to focus on that at this point in time, but I do understand there are incremental fixed costs in the SG&A line that we do have to take into consideration from an overall operating perspective. So we will continue to look at that, revisit it, but number one, I've got to give the value to the customer. If I have the opportunity to get a little bit more on the margin, I will, but we need to be very careful with that. We've got to make sure we stay relevant with the customer and keep the loyalty. That's great, Collin. Best of luck.

Thanks, Matt.

One moment for our next question. Our next question will come from Scott Ciccarelli of Truist. Your line is open.

Good morning, guys. Scott Ciccarelli. I have a derivative on one of the earlier questions. You guys used to talk about turning down, I think, about 90% of the offers that you would receive from vendors. Can you update us on where that is today, especially as you hit the 500 store mark?

Yeah, Scott, I think we say about 80% would turn down. I would tell you it's probably very similar today. The deal flow is very, very strong. Our merchants are being very selective in what they're buying from the vendor community. So that's not changed. We're seeing a big increase in flow from the community. So we're not struggling to get product into the pipeline at all.

All right. So you're still accepting about the same proportion. Got it. Thank you. And you also talked about seeing, obviously, the strong deal flow. Can you help us understand where is it coming from, meaning is it coming from certain subsets in the vendor community, whether it's CPG or other categories, verticals, et cetera? And alternatively, are there any areas where you might expect to see better deal flow as we kind of roll into 24? Thanks. Thanks.

Scott, I would tell you that this year at least, I can tell you it's been very, very broad-based. Almost every category we carry, we've seen a very significant amount of deal flow. I talked last year that we were starting to see some slowdown in the offerings of candy. Well, that flipped in 2023, and candy was very strong. So the overall, if I look at deal flow, You know, we've been seeing great deals in HBA, housewares, clothing, lawn and garden, electric auto. So it's just been all over the board. There's not really a shortfall in any category that I would tell you we're missing any business. And it's broad-based from either the CPGs are out there, major manufacturers are out there, there's wholesalers that are out there. But we're continuing to knock on the doors of the major manufacturers to go direct with them, and that's working very well.

Got it. Thank you very much.

Thanks, Scott.

One moment for our next question. Our next question will come from Mark Carden of UBS. Your line is open.

Good morning. Thanks so much for taking the questions. So it sounds like you're continuing to see strength in customers with greater than $100,000 in household income. How are repeat trips to this demographic comparing now to some of your more traditional demographics? And then how are these shoppers impacting your sales mix from a category standpoint? Are they buying higher ticket items, or are they more consistent with what you're used to?

Sure, Mark. I'll take the question, Derek. We are seeing strength, as you mentioned, in household incomes of $100,000 or greater. We're seeing actually a particular strength over $150,000 in household income. We are seeing an increased frequency from these customers as well. which is great to see, and basket size consistent or greater to the overall basket size of Ali's Army. I don't know the makeup of the ticket question, so that's something I'd have to study. You're asking about average, or AUR for that customer base. I don't have the answer to that.

Okay, that's so helpful. And then just on the labor front, what are you seeing there as we look ahead to 2024? And any thoughts on potential incremental pressure there?

It's hard to forecast, but in this moment, we're more stable than we were a year ago in terms of overall turnover. So it feels like that will continue into 2024. We're expecting some pressure, but not as much pressure as we felt the last couple of years. We still do have some challenges with I'll call it the churn of people that are with us for less than 90 days. But overall, it is improving. I'll ask Rob maybe to add some color on wage investments.

And I would say from a wage investment perspective, we've come a long way over the last couple of years. This year was a mid-single-digit wage increase across our store population. For next year, in terms of the outlook, in terms of operating margin, and what John referenced, we would consider a mid-single-digit increase for next year. Obviously, we're not giving guidance at the time, but we think mid-single-digit for next year, but potentially inching back towards the lower single-digit range.

Great. Thanks so much. Good luck, guys.

Thank you, Mark.

And one moment for our next question. Our next question will come from Paul Lewis of Citi. Your line is open.

Hey, everyone. This is Brandon Sheen. I'm on for Paul. I was wondering, you know, could you kind of break out what you changed for your fourth quarter outlook and then just spend a little time on, you know, particularly the comp, you know, 3% comp is a decent step down from 3Q. I understand we have a lot of time left for a holiday to go. Just trying to gauge how much of that is conservative or what you might be seeing quarter to date. Did you see any changes in consumer behavior in mid-October like some other retailers called out?

I'll speak to the Q4 guide and the financial information, then I'll let John speak to demand in October. From a guidance perspective, we no longer give quarterly guidance. We suspended doing that earlier this year. We updated our annual outlook, which considers a 3% comp for the fourth quarter. We tightened our gross margin range based on the strength of the Q3 performance. In terms of the Q4 sales guidance, We're going to continue to take a measured approach to guiding and setting expectations, but there's a saying we have around here that we're not going to shut the registers off, so stick with us and we'll look to do better if we can.

Yeah, Brandon, with regards to the consumer demand that some others might have spoke about in October, October was pretty much in line with our expectations. As you may recall, we shifted out an ad from October to November. So we, we expected a little bit of slowdown in that month. Um, but nothing, nothing was really alarming to us, uh, at the end of Q3. Um, and obviously we're for us to, you know, you've been following us for a long time for us to raise our guidance, uh, in a quarter that we're in today is, is means a lot to, it should mean a lot to the street that we're, we're, we're actually doing better than expected. Um, and we're excited from where we're at, but there's a lot of business to go here for the next 12 days and we'll see where everything lands.

Got it. I appreciate that. Just on supply chain costs in the third quarter, sounds like that may have been a bigger benefit than you initially expected. So just wondering, is that the case? Is that kind of back to, you know, quote, normal levels, whether that's back to, like, 2019 or however you gauge that? And then, you know, is there potential if, like, these trends continue? Like, would that be a potential benefit into next year?

This is Rob. Supply chain was pretty much in line with our expectations. We have some good visibility going out a quarter of the way that the accounting for the model works in terms of the capitalization of the costs. In terms of the composition of the supply chain cost, We're getting great ocean freight rates. They're below pre-pandemic levels. We still do have an incremental wage investment that's in there from kind of pre-pandemic algo levels, but it's relatively minor. In terms of trend, we would expect some favorability on the domestic transportation front. over the next months into years. But we wouldn't plan for any further improvement on ocean freight, given where it is versus pre-pandemic.

Got it. Thanks very much, and good luck, guys. Thanks, Brian. Thank you.

I would now like to turn the conference back to John for closing remarks.

I would like to thank everyone for their time and interest in OLLI's. We look forward to updating you on our continued progress on our next earnings call, and everyone have a great holiday season.

This concludes today's conference call. Thank you for participating. You may now disconnect.