Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen and thirty-nine weeks ended October 31, 2020, compared with the corresponding periods ended November 2, 2019. Although the request metadata references “2019 Q3,” the filing is for the third quarter of fiscal 2020. Results are unaudited and seasonal. Ollie’s operated 385 stores in 25 states at quarter-end.
Financial Performance and Position
| Metric | Q3 FY2020 | Q3 FY2019 | YTD FY2020 | YTD FY2019 |
|---|---|---|---|---|
| Net sales | $414.4 million | $327.0 million | $1.293 billion | $985.8 million |
| Gross profit | $171.5 million | $133.3 million | $518.7 million | $390.0 million |
| Gross margin | 41.4% | 40.8% | 40.1% | 39.6% |
| Operating income | $57.8 million | $35.7 million | $192.8 million | $107.3 million |
| Net income | $45.2 million | $27.0 million | $178.0 million | $90.8 million |
| Diluted EPS | $0.68 | $0.41 | $2.71 | $1.38 |
| Adjusted EBITDA | $65.3 million | $42.6 million | $214.4 million | $126.7 million |
- Q3 net sales increased 26.7%; year-to-date sales increased 31.2%.
- Comparable-store sales increased 15.3% in Q3 and 18.6% year to date. Store expansion contributed $40.2 million of Q3 sales growth and $136.9 million of year-to-date growth.
- Q3 operating margin increased to 13.9% from 10.9%; year-to-date operating margin increased to 14.9% from 10.9%.
- SG&A increased 17.0% in Q3 and 16.7% year to date, but declined as a percentage of sales to 25.5% and 23.6%, respectively.
- Net income benefited from excess tax benefits related to stock-based compensation of $2.0 million in Q3 and $33.8 million year to date. The year-to-date tax benefit was substantially affected by stock-option exercises by the estate of former CEO and Chairman Mark Butler.
- Cash and cash equivalents were $325.5 million at October 31, 2020, compared with $10.1 million at November 2, 2019 and $90.0 million at February 1, 2020.
- Year-to-date operating cash flow was $235.9 million, versus $14.3 million in the prior-year period. Capital expenditures were $25.9 million, versus $64.5 million, with the prior year including significant distribution-center construction spending.
- Total debt consisted primarily of finance leases: $1.0 million, including the current portion. No borrowings were outstanding under the $100.0 million revolving credit facility; availability was $95.3 million after letters of credit and reserves.
Material Changes and Unusual Items
- The company opened 19 stores in Q3, including one relocation, and reopened one temporarily closed store. Year to date, it opened 42 stores and closed two additional stores; four more stores opened after quarter-end.
- Gross-margin expansion reflected increased merchandise markup and reduced markdowns in Q3, with supply-chain costs partially offsetting the benefit.
- COVID-19-related premium pay was approximately $1.8 million in Q3 and $6.8 million year to date. The company also incurred incremental cleaning, personal protective equipment and other safety costs.
- Cash provided by financing activities was $25.5 million year to date, primarily from $26.6 million of stock-option exercise proceeds. In the prior-year period, financing cash use included $40.0 million of share repurchases.
- The company reported an immaterial correction to prior-period cash-flow presentation related to activity incorrectly classified as revolving-credit borrowings and repayments. The correction did not affect net financing cash flow, balance sheets or income statements.
- Operating lease liabilities totaled $388.1 million, including $65.2 million current and $322.95 million long term. The filing disclosed $31.5 million of minimum lease payments for signed but not yet commenced leases.
Outlook, Risks and Contingencies
- Management stated that its distribution network could support approximately 500 to 600 stores over the next several years. Its growth strategy centers on new-store openings, expanding bargain merchandise offerings and growing the Ollie’s Army loyalty program.
- The company expects cash on hand, operating cash flow and revolving-credit availability to fund planned capital expenditures, working capital, debt service and other financing needs for the next 12 months.
- No specific numerical earnings or sales guidance was provided in the filing. Management noted that COVID-19 makes near-term store-opening cadence and future performance more difficult to estimate.
- COVID-19 remains a material uncertainty. Renewed restrictions, store or distribution-center closures, supply-chain disruptions, labor shortages, higher operating costs and changes in consumer spending could materially affect results, liquidity and operations.
- Other risks include inventory procurement and demand forecasting, competition, tariffs and international sourcing, lease availability, distribution-center disruptions, seasonal working-capital needs, litigation, cybersecurity and the ability to comply with credit-facility covenants.
- A shareholder class-action lawsuit alleges misleading statements concerning earnings, projections, supply chain and inventory. The motion to dismiss was fully briefed as of July 22, 2020; management believes the case is without merit and does not expect current litigation to have a material adverse effect.
- The company was in compliance with its credit-facility terms and fixed-charge coverage covenant as of October 31, 2020. The facility restricts certain dividends and other payments to the parent, subject to exceptions.
Key Facts for Investors to Verify
- Whether the unusually strong comparable-store growth, including stimulus-related and pandemic-driven spending, persists after government aid and temporary retail spending shifts normalize.
- The magnitude and duration of COVID-19-related labor, safety and supply-chain costs, and whether renewed restrictions affect store or distribution-center operations.
- The sustainability of the 40.1% year-to-date gross margin and 14.9% operating margin after the pandemic-related sales mix and tax benefits subside.
- The extent to which the $178.0 million year-to-date net income was influenced by the $33.8 million discrete stock-compensation tax benefit.
- Future capital expenditures, store-opening cadence, lease commitments and the company’s ability to fund expansion without drawing on the revolving facility.
- Developments in the shareholder litigation and any potential financial or reputational consequences.