Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Filing and period: Quarterly report for the thirteen and twenty-six weeks ended August 1, 2020, compared with August 3, 2019. The request metadata identifies “2019 Q2,” but the filing is clearly for fiscal 2020 second quarter. The company operated 366 stores in 25 states and one operating segment.
Business Context and Reporting Period
Ollie’s is an extreme-value retailer focused on overstocked, overproduced and closeout merchandise, supplemented by private-label products. Fiscal 2020 refers to the 52-week period ending January 30, 2021. The company’s stores and distribution centers continued operating as an essential business during the COVID-19 pandemic.
During the quarter, the company opened six stores. For the twenty-six-week period, it opened 23 stores and temporarily or permanently closed two stores. Its distribution network comprised three facilities with approximately 2.2 million square feet of capacity.
Financial Performance
| Metric | 13 weeks ended Aug. 1, 2020 | 13 weeks ended Aug. 3, 2019 | 26 weeks ended Aug. 1, 2020 | 26 weeks ended Aug. 3, 2019 |
|---|---|---|---|---|
| Net sales | $529.3 million | $333.9 million | $878.7 million | $658.7 million |
| Gross profit | $206.8 million | $124.0 million | $347.2 million | $256.8 million |
| Gross margin | 39.1% | 37.2% | 39.5% | 39.0% |
| Operating income | $92.0 million | $30.8 million | $135.0 million | $71.5 million |
| Net income | $99.4 million | $25.2 million | $132.8 million | $63.9 million |
| Diluted EPS | $1.50 | $0.38 | $2.02 | $0.96 |
| Adjusted EBITDA | $99.4 million | $37.5 million | $149.1 million | $84.1 million |
Second-quarter net sales increased 58.5%, driven by a 43.3% comparable-store sales increase and growth from newer stores. Year-to-date net sales increased 33.4%, including a 20.2% comparable-store sales increase.
Second-quarter operating income increased 199.3% and net income increased 294.8%. Year-to-date operating income increased 88.7% and net income increased 107.9%. Second-quarter adjusted EBITDA increased 164.9%; year-to-date adjusted EBITDA increased 77.2%.
SG&A increased 25.0% in the quarter and 16.5% year to date, but declined as a percentage of sales to 20.6% from 26.2% in the quarter and to 22.6% from 25.9% year to date. The company incurred approximately $3.6 million of COVID-related premium pay in the quarter and approximately $5.0 million year to date.
Cash Flow, Liquidity and Debt
| Metric | 26 weeks ended Aug. 1, 2020 | 26 weeks ended Aug. 3, 2019 |
|---|---|---|
| Cash provided by operating activities | $210.2 million | $18.6 million |
| Cash used in investing activities | $18.0 million | Cash provided of $2.3 million |
| Cash provided by financing activities | $23.0 million | $5.6 million |
| Capital expenditures | $18.1 million | $40.4 million |
| Cash and cash equivalents at period end | $305.1 million | $78.5 million |
Operating cash flow benefited from higher net income and favorable working-capital movements, including inventories, accounts payable and accrued liabilities. Capital expenditures declined because the prior-year period included substantial investment in the Lancaster, Texas distribution center.
The company had no borrowings under its $100.0 million revolving credit facility, $92.0 million of borrowing availability, $7.8 million of outstanding letters of credit and $0.2 million of rent reserves. Finance lease debt totaled approximately $0.9 million. Operating lease liabilities totaled $374.0 million, including $56.1 million current and $317.9 million long term.
Management stated that cash, operating cash flow and revolver availability should be adequate for planned capital expenditures, working capital, debt service and other financing needs over the following twelve months. The company was in compliance with its credit facility covenants.
Material Changes Versus the Prior Comparable Period
- COVID-19-related consumer demand, federal stimulus payments and continued store operations drove significantly higher traffic, transaction counts and average basket size.
- Gross margin increased 190 basis points in the quarter and 50 basis points year to date, reflecting improved merchandise margins and supply-chain leverage.
- SG&A leverage more than offset higher pandemic-related payroll, cleaning and safety expenses.
- The effective tax rate was unusually low: negative 8.0% in the quarter and 1.7% year to date, primarily because of excess tax benefits from stock-based compensation, including exercises by the estate of former CEO and Chairman Mark Butler.
- The estate of Mark Butler exercised approximately 1.9 million vested stock options during the quarter, generating $17.1 million of proceeds. Total stock-option exercise proceeds were $24.1 million year to date.
- Cash increased by $215.2 million year to date, compared with a $26.5 million increase in the prior-year period.
- The company had $60.0 million remaining under its $100.0 million share repurchase authorization; no additional repurchases were reported in the provided filing text.
Guidance, Outlook, Risks and Unusual Items
Management expected sales to moderate during the second half of fiscal 2020 following the unusually strong second-quarter performance. The company expected to open 46 stores, including one relocation, during fiscal 2020, but warned that COVID-19 could delay construction and permitting. Management continued to target long-term expansion supported by distribution capacity for approximately 500 to 600 stores.
The principal uncertainty is the duration and severity of COVID-19 and its effects on consumer spending, store traffic, labor costs, supply chains, distribution centers and store operations. Management also identified risks related to inventory procurement, competition, imported merchandise and tariffs, lease terms, new-store execution, seasonal working-capital needs, information systems, litigation and compliance with debt covenants.
The filing reports a purported shareholder class action alleging materially false or misleading statements regarding earnings, projections, supply chain and inventory during March 26 through August 28, 2019. The company and individual defendants moved to dismiss, and the motion 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, although the ultimate outcome is uncertain.
The company corrected the prior-period cash-flow presentation for activity incorrectly classified as revolving-credit borrowings and repayments. The correction did not affect total financing cash flow, the balance sheets or income statements.
Important Facts for Investors to Verify
- Confirm that the relevant filing period is fiscal 2020 second quarter, not 2019 second quarter, despite the request metadata.
- Assess the sustainability of the 43.3% quarterly comparable-store sales increase after stimulus-related demand and unusual pandemic shopping patterns fade.
- Separate recurring operating earnings from the unusually favorable tax impact, including $30.5 million of quarterly excess tax benefits and $31.7 million year to date.
- Monitor COVID-19 effects on sales moderation, premium pay, cleaning costs, supply availability, store operations and new-store openings.
- Review liquidity relative to approximately $374.0 million of operating lease liabilities and the company’s seasonal inventory build.
- Verify the status and potential exposure of the shareholder class action and any related disclosure in subsequent filings.
- Reconcile adjusted EBITDA to GAAP earnings because adjusted EBITDA excludes stock-based compensation and other specified items.