Ollie's Bargain Outlet Holdings, Inc.

Good morning, and welcome to OLLI's Bargain Outlets conference call to discuss the financial results for the third quarter of fiscal year 2024. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and interactive instructions will follow at that time. Please be advised this call is being recorded, and the reproduction of this call, in whole or in part, is not permitted without express written authorization of OLLI's. Joining us on the call today from OLLI's management are John Swigert, Chief Executive Officer, Eric Vandervalk, Certain comments made today may constitute forward-looking statements and are made pursuant 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 risk and uncertainties that could cause actual results to differ materially from such statements. These risk and uncertainties are described in our annual reports on Form 10-K and quarterly reports on Form 10Q, on file with SEC, and in the earnings press release. Forward-looking statements made today are as of today's date of the 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 the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings press release. With that said, I'll turn the call over to Mr. Swigert. Please go ahead.

Thank you, and good morning, everyone. We appreciate you joining our call today. We had another great quarter and are pleased with our results. We delivered strong earnings on higher sales, gross margin, and disciplined expense control. Even more important, we also took advantage of a number of real estate opportunities that strengthened our new store pipeline and enhanced our competitive positioning for the future. In the quarter, we saw strong demand for everyday consumables such as cleaning supplies, food, and candy. As we have discussed before, our growing relationships with major manufacturers of these categories is leading to strong product flow and a more consistent assortment of everyday merchandise. We had a great selection of consumables and were ready for the strong demand. Outside of consumables, we also saw strong demand for certain discretionary related categories such as furniture and outdoor living. We believe the warm weather in October, along with the late timing of Thanksgiving, impacted our sales of seasonal goods in the third quarter. As the weather normalized and we approached the Thanksgiving holiday, we saw accelerating trends in our seasonal categories. We were pleased with our Black Friday weekend sales and the current momentum in our business. Now more than ever, consumers want value and suppliers need bigger partners. We are benefiting from these two trends, and our buyers are doing an amazing job of finding a great assortment of exciting deals. We sell good stuff cheap, and we have been in the closeout business for more than 42 years. Our value proposition is selling quality name brand products that people need and want for their everyday lives at prices typically 20% to 70% below the fancy stores. Anyone can sell cheap products, but we're all about real brands, real bargains. This has been our value proposition from day one and continues to be our competitive moat. The growth of large retailers and suppliers has led to bigger order sizes, higher levels of excess inventory, and growth in the closeout industry. Big branded suppliers are very careful about product placement and channel conflict. At the same time, the larger order sizes are driving larger production quantities and a continuous cycle of excess product. Our size, scale, experience, and strong financial position are increasingly important advantages we have when buying closeouts. With over 550 stores in 31 states, we are the largest buyer of closeouts and excess inventory. While we are getting larger, other closeout players are shrinking or going away altogether. This is leading to stronger vendor relationships and increased deal flow. At the same time, the investments we have made in the business over the last several years have made us a more nimble organization. This has led to better execution and more consistent results. Both Eric and Rob have been an integral part of making these investments, and as my time as CEO comes to a close, I could not be prouder of what we have built and the strength of our positioning going forward. Transition of the CEO role and responsibilities is progressing as planned. Eric will become CEO and I will move to the executive chairman role at the beginning of fiscal 2025. Given the planned timing of things, this will be my last public earnings call. It's been an amazing 20 plus years and I would like to thank each and every team member that has been part of our family. Operating a closeout retailer is not for the faint of heart. The unpredictable nature of the model creates many ups and downs and operational challenges. but Ollie's is a special company that was founded by passionate individuals who kept things simple and stayed true to their model. I was fortunate to work with co-founder Mark Butler for many years. I hope that I have made him proud during my tenure as CEO. Everything that we have built and stand for came from Mark and Mort, and we continue to honor their legacy by staying true to our mission of saving customers money and selling good stuff cheap. While proud of what we've accomplished, I am more excited about our growth potential and competitive positioning going forward. Our value proposition is clear, our deal flow is strong, and our ability to execute is as good as it's ever been. We remain focused on delivering profitable growth, consistent results, and enhancing shareholder value. With that said, I would now like to turn the call over to Eric.

Thanks, John, and good morning, everyone. We are pleased with our third quarter performance. The process improvements and investments we have made in our people, supply chain, stores, and marketing continue to result in better and more consistent execution. The third quarter was a great example of this. We delivered earnings that were in line with expectations despite some temporary headwinds. We also opportunistically acquired a number of real estate sites that bolstered our new store pipeline and competitive positioning. The first of these opportunities was the 499-set-only stores in Texas. We acquired these stores out of bankruptcy in May and shifted our organic new store pipeline to prioritize opening these first. In August, we soft opened several of these stores as a test, minimizing the dead rent and reducing the operational burden of opening so quickly after assuming possession of the sites. Given these stores had been open and active with discount shoppers just a few months prior, we expected they might ramp faster than our typical new stores. Several were top performing stores right out of the gate. We later followed up with an official grand opening event and could not be happier with the quick ramp and performance of these stores. The second real estate opportunity is the closing Big Lots stores. To date, we have acquired 17 store locations and were the winning bidder on an additional seven stores last Friday. Similar to the 99 cent only stores, these stores are the right size, located in good trade areas, have attractive rents and leasing structures, and have been serving value-oriented customers for many years. We will prioritize the opening of the acquired stores that expect to have these open by the end of the first quarter next year. With these additional stores, our new store pipeline is very strong, and our store openings in 2025 will be front-loaded as a result. Our initial plan for next year is a minimum of 56 new stores, which meets our 10% needed growth goal. We will continue to evaluate the new store pipeline and opening schedule as any new opportunities unfold. 2025 will be a record year for new store openings, and there is the potential for additional real estate opportunities on the horizon. Bankruptcies and closures of retailers come with market disruptions. In the short term, it can lead to increased competition for our stores going up against liquidations. This is offset by longer-term opportunities in product flow, market share, and talent acquisition. To support our accelerated growth, we continue to invest in supply chain. Our newly opened distribution center in Princeton, Illinois began shipping stores in July and is capable of servicing more than 150 stores. The new facility has a number of technology and productivity enhancements that will help us scale and increase productivity over time. The Midwest is an area that contains significant growth potential for Ollie's, and the newly acquired stores will help us better leverage this asset. With the new DC in place, we now have the capacity to service up to 750 stores in total, which provides runway for several years of growth. A few other supply chain-related comments. The port strike was really a non-event for us. We continue to closely monitor the potential for increased tariffs. Our flexible buying model allows us to adjust our pricing to changes in the marketplace and pivot between different products. As a reminder, direct imports from China account for approximately 15% of our product flow in any given year. Before I turn the call over to Rob, I would like to thank the entire OLLI's team for their continued hard work and commitment. I would also like to recognize our associates in the hurricane impacted areas. Hurricanes Helene and Milton were devastating and I'm thankful that our team members are safe and doing what they can for their local communities. I'm honored to be part of an organization that has a clear purpose and an amazing culture. We are proud to sell good stuff cheap and save customers money on the things they want and need. I would also like to thank John for his leadership and impressive 20-year career in which Ollie's delivered nearly unparalleled results in the retail industry. We are especially appreciative for the leadership John provided through the unexpected passing of Mark Butler, which took place only moments before the pandemic started. He's been an incredibly strong shepherd of the business model and our culture. I appreciate John's mentorship and the trust he and the board have placed in me to lead Ollie's into the next stage of growth. Thank you. Rob.

Thanks, Eric, and good morning, everyone. We are very pleased with our third quarter results. We delivered a 14% increase in adjusted EPS, driven by an 8% increase in sales, a 100 basis point increase in gross margin, and disciplined expense control. We also opened 24 new stores in the quarter, which was a record number for us. In the third quarter, we faced a number of short-term headwinds that impacted sales. These included a shift of one flyer out of the third quarter and into the fourth quarter, the two major hurricanes, the big lots, store closures and liquidations, and unseasonably warm temperatures. Despite these headwinds, we still delivered earnings that were in line with our expectations, and our outlook for the fourth quarter is largely unchanged. Now let me take you through the third quarter numbers. Net sales increased 8% to $517 million, driven by new store growth. Comparable store sales declined 0.5%, with both transactions and baskets down slightly. Demand for everyday consumer staples was strong throughout the quarter, and our best performing categories were food, candy, housewares, and furniture. OLLI's Army membership increased 8% to 14.8 million members, and sales to our members represented over 80% of total sales. Consistent with prior trends, we're seeing growth in our younger customer demographic, and retention of higher income customers. We ended the quarter with 546 stores in 31 states, an increase of 8% year over year. As mentioned, we opened a record 24 new stores and closed three stores. Of the three closures, one was a temporary closure from a store that was flooded due to Hurricane Helene, and two were store leases that we chose not to renew. We are pleased with the performance of our new stores, including the former 99 cents only stores, which are off to a solid start. Gross margin increased 100 basis points to 41.4%, driven primarily by lower supply chain costs, partially offset by lower merchandise margin from the higher mix of consumer staples. SG&A expenses and percentage of net sales increased 40 basis points to 29.9% due to deleverage of fixed expenses associated with a decrease in comparable store sales. Operating income increased 14% to $45 million, and operating margin increased 50 basis points to 8.6% in the quarter. Adjusted net income increased 13% to $36 million, and adjusted earnings per share increased to 58 cents. Lastly, adjusted EBITDA increased 17% to $60 million, and adjusted EBITDA margins increased 100 basis points to 11.6% for the quarter. Turning to the balance sheet, being a public company with a strong balance sheet is a strategic asset in the closed-down industry. Not only does it enhance our credibility with vendors and allows us to make larger deals, it gives us the flexibility to pursue just about any opportunity as it arises. We ended the quarter with $304 million between cash on hand and short-term investments and no outstanding borrowings under a revolving credit facility. Inventory has increased 14% to $607 million, primarily driven by new unit growth and the timing of receipts. Capital expenditures totaled $31 million for the quarter and were primarily related to the development of new stores and the remodeling of the existing stores. We bought back $16 million of our common stock in the third quarter, bringing our year-to-date share repurchases to $47 million, in line with our targeted capital allocations. Turning to our outlook, our updated guidance for fiscal 2024 is contained in a table in today's earnings press release. Our outlook for the fourth quarter is largely unchanged and we feel good about our positioning heading into the Christmas holiday and remaining weeks of the fiscal year. The ranges for net sales and comparable store sales are now 2.27 to 2.28 billion and 2.7 to 3% respectively. The slight narrowing of the ranges are the result of our third quarter results, the one unplanned store closure, and the timing of new store openings. Our gross margin outlook of 40% is unchanged, as is our outlook ranges for adjusted net income and adjusted earnings per share. Pre-opening expenses are now slightly higher due to rent expenses associated with the recently acquired stores and the front end loaded new store opening schedule for next year. For new store openings, we're still targeting a total of 50, less the two closures that we chose not to renew the lease and the one temporary closure of the flood-impacted North Carolina store. We expect to open 13 stores in the fourth quarter and are targeting a minimum of 10% new unit growth for next year. Next year's store openings will be more heavily weighted to the first half, with the majority of stores opening in the first and second quarters. As John discussed, we have seen a nice acceleration in business over the last several weeks, and we're pleased with our Black Friday weekend sales. We believe that the shorter selling season between Thanksgiving and Christmas could make for a bigger holiday rush in the mid to late December period, and our current trends seem to support this. We are locked and loaded with great deals for our customers. Finally, just a quick reminder that this fiscal year has 52 weeks versus 53 weeks last year. The extra week last year contributed approximately $34 million in net sales and about $0.04 to diluted earnings per share. Now let me turn the call back over to John.

Thanks, Rob. I would like to thank the entire OLLI's team for everything they do. It's truly the combined experience, passion, and commitment from everyone that makes OLLI successful. I cannot be prouder of what we have accomplished and look forward to our future success. As we say, we are OLLI's! That concludes our prepared remarks, and we are now happy to take your questions. Operator?

Thank you. Ladies and gentlemen, if you have a question or a comment at this time, please press star 1 and 1 on your telephone. If your question has been answered, you can remove yourself from the queue. Please press star 1 and 1 again. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Matthew Boston, JP Morgan. Your line is open.

Great. Thanks. And John congrats on the transition. He'll be missed. Thanks, Matt.

I'll still be around though. Don't forget that. Am I disappearing?

Always, always. Um, so could you maybe speak to the cadence of three Q comps, maybe parsing through best you can, some of the transitory headwinds that you faced and then on November and four Q maybe best you can, if you could elaborate on November trends that you've seen in the business, And just your confidence in above algorithm comps in the fourth quarter, despite consolidation disruption, the shortened calendar, just how you kind of put it all together.

Hey, Matt, it's Rob. I'll take that one. From a quarterly flow on the comps for Q3, August was down slightly, which was better than our plan because the flyer shift shifted out of August in that month. September was up slightly positive, which we thought was really good considering that was the month in which we were impacted by the hurricanes, which was about, call it a 50 basis point impact to our comp overall for the quarter. And then lastly, we ended in October, and October was the softest month of the quarter. It was down, call it negative low single digits. And that's really where the warm weather started to impact us in our seasonal categories. Coming into the fourth quarter, you know, our trends are good. We were pleased with the Black Friday weekend and holiday. You know, we've seen as we're getting closer to the Christmas holiday, our trends continue to strengthen. And from an over-algo perspective from the fourth quarter, remember we do have that flyer shift that shifted out of August. and shifted into this quarter. So that gives us about an extra 100 basis points of comp. And that flyer still sits ahead of us today.

Great. And then maybe, Eric, as a follow-up, could you just elaborate on the white space unit growth opportunity multi-year you see? Just puts and takes to consider relative to the 10% plus unit growth for next year. And just as the fleet expands, what are you seeing from vendor relations? We lost audio. Yeah, I think we did. Hang on. Let me unmute my line here, see if that helps. Here. Can you hear me?

Hello? Hello? Can you guys hear me? Yes, can you hear me? Testing.

One moment, ladies and gentlemen. Please stand by.

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