Ollie's Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Second fiscal quarter and year-to-date periods ended August 3, 2019, compared with August 4, 2018. Although the request identifies “2018 Q2,” the filing is the 2019 second-quarter Form 10-Q. The company operated 332 stores in 23 states and reported one operating segment.
Business Context and Reporting Period
Ollie's is an extreme-value retailer that purchases overstocked, closeout and private-label merchandise. It opened eight stores in the quarter and 29 stores year to date, compared with six and 14, respectively, in the prior-year periods. Management expects to open 42 stores during fiscal 2019 and is developing a third distribution center in Lancaster, Texas.
The business is seasonal, with demand generally highest in the fourth fiscal quarter. Interim results are therefore not necessarily indicative of full-year performance.
Financial Performance and Key Metrics
| Metric | 13 Weeks Ended Aug. 3, 2019 | 13 Weeks Ended Aug. 4, 2018 | 26 Weeks Ended Aug. 3, 2019 | 26 Weeks Ended Aug. 4, 2018 |
|---|---|---|---|---|
| Net sales | $333.9 million | $288.1 million | $658.7 million | $563.8 million |
| Net sales growth | 15.9% | — | 16.8% | — |
| Gross profit | $124.0 million | $112.6 million | $256.8 million | $225.5 million |
| Gross margin | 37.2% | 39.1% | 39.0% | 40.0% |
| Operating income | $30.8 million | $34.9 million | $71.5 million | $70.8 million |
| Operating margin | 9.2% | 12.1% | 10.9% | 12.6% |
| Net income | $25.2 million | $29.8 million | $63.9 million | $60.3 million |
| Diluted EPS | $0.38 | $0.45 | $0.96 | $0.92 |
| Adjusted EBITDA | $37.5 million | $40.3 million | $84.1 million | $81.2 million |
Year-to-date operating cash flow was $18.6 million, versus $22.5 million in the prior-year period. Capital expenditures were $40.4 million, compared with $10.2 million, while investing cash flow was $2.3 million, including approximately $42.0 million of sale-leaseback proceeds. Cash increased to $78.5 million from $51.9 million at fiscal year-end and $29.4 million at the prior-year comparable date.
At August 3, 2019, inventory was $354.6 million and total assets were $1.54 billion. Adoption of the new lease standard resulted in recognition of $321.4 million of operating lease right-of-use assets and $319.3 million of operating lease liabilities, including $54.6 million current and $264.7 million long term.
Total debt was $0.8 million, consisting primarily of finance leases. The company had no revolving credit borrowings, $91.1 million of borrowing availability, $8.7 million of letters of credit and $0.2 million of rent reserves. The refinanced revolving facility matures May 22, 2024.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by new and non-comparable stores; non-comparable sales increased $50.4 million in the quarter and $97.4 million year to date.
- Comparable-store sales declined 1.7% in the quarter and 0.5% year to date, versus increases of 4.4% and 3.2%, respectively, in the prior-year periods.
- Quarterly gross margin contracted 190 basis points, reflecting lower merchandise margin and supply-chain cost deleverage. Year-to-date gross margin declined 100 basis points.
- Quarterly SG&A increased 19.7% and rose to 26.2% of sales from 25.3%; year-to-date SG&A increased 17.4% and represented 25.9% of sales.
- Quarterly net income declined 15.7% and diluted EPS declined to $0.38 from $0.45. Year-to-date net income increased 5.9% and diluted EPS increased to $0.96 from $0.92.
- Adjusted EBITDA declined 6.8% in the quarter because of lower gross margin and SG&A deleverage, but increased 3.5% year to date.
- The company refinanced its revolving credit facility, paid off its prior term loan, adopted the new lease accounting standard and completed a 12-property sale-leaseback for approximately $42.0 million with no net gain or loss.
Outlook, Risks, Contingencies and Unusual Items
Management expects store expansion to remain the primary driver of sales growth and expects cash, operating cash flow and revolving-credit availability to fund planned capital expenditures, working capital, debt service and other financing needs over the next 12 months. The filing does not provide a detailed full-year revenue or earnings guidance range.
Key risks include inventory procurement and demand forecasting, consumer spending, competition, new-store execution, lease availability and terms, distribution-center disruptions, seasonal working-capital needs, limited online retail operations, litigation, information-technology systems, tariffs on imported goods, and compliance with debt covenants. The company was in compliance with its credit facility covenants at period end and reported no material off-balance-sheet arrangements.
The board authorized up to $100.0 million of share repurchases. No repurchases occurred during the reported periods; however, the company subsequently repurchased 241,231 shares for $13.5 million through September 4, 2019. Ordinary-course legal claims were not expected to have a material adverse effect.
Effective tax rates were 19.1% for the quarter and 11.3% year to date, influenced by excess tax benefits from stock-based compensation of $1.7 million and $9.8 million, respectively. These tax benefits make period-to-period net income comparisons less representative of underlying operating performance.
Important Facts for Investors to Verify
- Whether comparable-store sales stabilize after the quarterly and year-to-date declines.
- Whether merchandise margins and supply-chain costs recover from the reported pressure.
- Execution and capital requirements for the 42 planned fiscal-2019 store openings and the Lancaster distribution center.
- Seasonal inventory growth, working-capital requirements and potential use of the revolving credit facility ahead of the holiday period.
- The effect of the $100.0 million repurchase authorization and subsequent repurchases on cash, shares outstanding and leverage.
- The impact of lease obligations, including $375.1 million of undiscounted operating lease payments and $45.3 million for signed but not yet commenced leases.
- The sustainability of earnings given the quarter’s lower operating margin, higher effective tax rate and reliance on new-store growth.