Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended October 28, 2017, compared with the periods ended October 29, 2016. The provided filing is for fiscal 2017 third quarter, not 2016 Q3 as indicated in the request metadata. Fiscal 2017 is a 53-week year ending February 3, 2018.
Business Context
Ollie’s is an extreme-value retailer of overstocked, overproduced and closeout merchandise, supplemented by private-label products. The company operated 265 stores in 20 states at quarter-end, supported by distribution centers in Pennsylvania and Georgia. It opened 15 stores in the quarter and 31 stores year to date.
Financial Performance
| Metric | Q3 2017 | Q3 2016 | Year-to-date 2017 | Year-to-date 2016 |
|---|---|---|---|---|
| Net sales | $238.1 million | $202.0 million | $720.4 million | $607.0 million |
| Gross profit | $98.0 million | $84.2 million | $291.2 million | $247.0 million |
| Gross margin | 41.2% | 41.7% | 40.4% | 40.7% |
| Operating income | $24.2 million | $18.6 million | $81.4 million | $61.6 million |
| Net income | $18.9 million | $10.5 million | $57.5 million | $35.3 million |
| Diluted EPS | $0.29 | $0.17 | $0.89 | $0.57 |
| Adjusted EBITDA | $29.2 million | $23.6 million | $96.2 million | $76.0 million |
- Q3 sales increased 17.9%; year-to-date sales increased 18.7%.
- Comparable-store sales increased 2.1% in Q3 and 2.8% year to date. Most sales growth came from non-comparable stores and the expanded store base.
- Q3 operating margin increased to 10.2% from 9.2%; year-to-date operating margin increased to 11.3% from 10.2%.
- Q3 net margin increased to 7.9% from 5.2%; year-to-date net margin increased to 8.0% from 5.8%.
- Adjusted EBITDA margin increased to 12.3% in Q3 from 11.7% and to 13.4% year to date from 12.5%.
Cash Flow, Liquidity and Capital Structure
- Year-to-date operating cash flow was $20.4 million, compared with $4.2 million in the prior-year period.
- Capital expenditures were $15.2 million, compared with $14.2 million. Investing cash outflow was $15.1 million.
- Financing cash outflow was $61.8 million, primarily reflecting $65.0 million of voluntary term-loan prepayments. Cash declined by $56.5 million to $42.2 million from $98.7 million at fiscal year-end.
- Total debt was $126.0 million at October 28, 2017, including $125.6 million under the term loan and $0.4 million of capital leases. There were no revolving-credit borrowings.
- Revolving-credit availability was $98.5 million, with $1.3 million of letter-of-credit commitments and $0.2 million of rent reserves.
- The term loan carried an interest rate of 2.99% at quarter-end and matures January 29, 2021. The company was in compliance with its financial and business covenants.
- On November 21, 2017, after quarter-end, the company used cash on hand to repay an additional $30.0 million of term debt.
Material Changes Versus Prior Comparable Period
- Sales benefited from 33 more stores at quarter-end than the prior-year period, with 265 stores versus 232.
- Gross margin declined 50 basis points in Q3 and 30 basis points year to date due primarily to lower merchandise margins, partly offset by favorable supply-chain costs.
- SG&A increased in dollars with store growth but declined as a percentage of sales by 140 basis points in Q3 and 130 basis points year to date.
- Interest expense declined 18.6% in Q3 and 20.7% year to date because of the $65.0 million term-loan prepayment.
- Income-tax rates fell to 18.2% in Q3 and 25.6% year to date from 39.3% and 38.1%, respectively, primarily because of discrete excess tax benefits from adoption of ASU 2016-09. These benefits increased reported earnings and may not recur at the same level.
- Year-to-date results included a $0.4 million loss on debt extinguishment related to accelerated debt issuance costs and original issue discount.
Outlook, Risks and Unusual Items
- Management expects new-store growth to remain the primary driver of sales and profitability growth. The company opened three additional stores after quarter-end and expects continued investment in stores, distribution centers and information technology.
- Management believes cash, operating cash flow and available revolver capacity will fund planned capital expenditures, working capital and debt service for the next 12 months, although additional financing could be required if those sources are insufficient.
- The business is seasonal, with demand and inventory generally highest in the fourth quarter. Inventory was $284.3 million at quarter-end versus $210.1 million at fiscal year-end, reflecting holiday preparation and store growth.
- The company commenced 34 new leases year to date with approximately $47.0 million of future minimum lease payments. Substantially all stores and distribution centers are subject to operating leases.
- Key risks include inventory procurement and demand forecasting, consumer spending, competition, store-opening execution, lease availability, distribution-center disruptions, seasonal volatility, information systems, international sourcing, online-retail exposure and debt-service or covenant compliance.
- The company is evaluating the future revenue-recognition standard, which may affect loyalty-program revenue, gift-card breakage and sales-return presentation. It expects the future lease standard to create significant right-of-use assets and lease liabilities.
- Management reported effective disclosure controls, no material changes to internal control over financial reporting, and no significant change in previously disclosed risk factors. Pending litigation was not considered reasonably likely to have a material adverse effect.
Investor Verification Points
- Confirm the filing period: the document covers Q3 fiscal 2017 ended October 28, 2017, despite the request metadata referencing 2016 Q3.
- Assess the sustainability of growth driven by new stores versus comparable-store sales, which increased only 2.1% in Q3 and 2.8% year to date.
- Separate the recurring earnings trend from the $4.7 million Q3 and $9.8 million year-to-date discrete tax benefits.
- Monitor gross-margin pressure, inventory growth, holiday-season execution and working-capital requirements.
- Verify the effect of the subsequent $30.0 million debt repayment on cash balances, leverage and future interest expense.
- Review lease commitments, covenant requirements, variable interest rates and the expected balance-sheet impact of the new lease accounting standard.