Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Business Context and Reporting Period
Ollie’s is an extreme-value retailer purchasing overproduced, overstocked and closeout merchandise, supplemented by private-label products. The Company operated 282 stores in 22 states as of August 4, 2018 and used two distribution centers. The filing covers the thirteen and twenty-six weeks ended August 4, 2018, compared with July 29, 2017. Although the request metadata identifies “2017 Q2,” the provided filing is for fiscal 2018 second quarter.
The financial statements are unaudited. The business is seasonal, with generally higher demand and working-capital requirements in the third and fourth fiscal quarters.
Key Financial Metrics
| Metric | Thirteen weeks ended August 4, 2018 | Year-over-year change | Twenty-six weeks ended August 4, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $288.1 million | 13.1% | $563.8 million | 16.9% |
| Comparable-store sales | 4.4% | Prior period: 4.5% | 3.2% | Prior period: 3.2% |
| Gross profit | $112.6 million | 12.4% | $225.5 million | 16.7% |
| Gross margin | 39.1% | Down 30 bps | 40.0% | Down 10 bps |
| Operating income | $34.9 million | 16.9% | $70.8 million | 23.9% |
| Net income | $29.8 million | 51.4% | $60.3 million | 55.9% |
| Diluted EPS | $0.45 | From $0.30 | $0.92 | From $0.60 |
| Adjusted EBITDA | $40.3 million | 15.4% | $81.2 million | 21.3% |
Second-quarter SG&A increased 11.0% to $73.0 million but declined to 25.3% of sales from 25.8%. Year-to-date SG&A increased 14.0% to $145.4 million and declined to 25.8% of sales from 26.4%. Pre-opening expenses were $1.9 million for the quarter and $3.7 million year to date.
Cash Flow, Liquidity and Debt
- Year-to-date operating cash flow was $22.5 million, compared with cash used of $2.7 million in the prior comparable period.
- Year-to-date capital expenditures were $10.2 million, compared with $8.7 million previously.
- Cash used in financing activities was $22.2 million, including $27.6 million of term-loan and capital-lease repayments. The prior-period financing outflow was $62.5 million.
- Cash and cash equivalents were $29.4 million at August 4, 2018, versus $39.2 million at fiscal year-end and $24.8 million at July 29, 2017.
- Total debt was $21.7 million, consisting primarily of $21.2 million under the term loan; there were no revolving-credit borrowings.
- Revolving-credit availability was $95.4 million, with $4.3 million of letters of credit and $0.3 million of rent reserves. The Company was in compliance with its debt covenants.
- Management stated that cash, operating cash flow and revolving-credit availability should be adequate for planned capital expenditures, working capital and debt service over the next twelve months.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by 14 stores opened year to date and higher sales from non-comparable stores, supplemented by positive comparable-store sales.
- Gross margin declined modestly because of higher supply-chain costs as a percentage of sales, partially offset by improved merchandise margin.
- Operating leverage improved as SG&A declined as a percentage of sales.
- Interest expense fell 75.3% in the quarter and 66.8% year to date because of term-loan prepayments and lower average debt balances.
- Effective tax rates fell to 13.7% for the quarter and 13.8% year to date, compared with 31.3% and 28.8%, respectively, primarily due to the 2017 Tax Cuts and Jobs Act and discrete tax benefits from stock-based compensation.
- The Company adopted the new revenue-recognition standard on February 4, 2018, reducing opening retained earnings by $5.6 million. The adoption added an $8.6 million loyalty-program liability at August 4, 2018 but did not materially affect the current-period income statement or cash flows.
- Term-loan prepayments were $25.0 million year to date, compared with $65.0 million in the prior period.
Guidance, Outlook, Risks and Unusual Items
- The Company expected to open 36 to 38 stores during fiscal 2018; 14 had opened through August 4, 2018. Management expects store growth to remain the primary sales-growth driver.
- Management targets new stores of approximately 25,000 to 35,000 square feet, with an average initial cash investment of approximately $1.0 million and target sales of approximately $3.9 million.
- On August 29, 2018, after the quarter ended, the Company acquired 12 former Toys “R” Us store sites for approximately $42.0 million.
- Twenty-one new store leases commenced during the first twenty-six weeks, with approximately $27.4 million of future minimum initial-term lease payments.
- Key risks include inventory procurement and demand forecasting, consumer spending, competition, store-opening execution, lease availability and terms, distribution-center disruptions, seasonal fluctuations, technology and cybersecurity, international sourcing, debt service and covenant compliance, and the absence of a significant online retail operation.
- Substantially all store and distribution-center leases are operating leases. The Company expected adoption of the forthcoming lease standard to create significant right-of-use assets and lease liabilities.
- Ordinary-course litigation was not expected to have a material adverse effect. No significant changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Confirm the reporting-period mismatch: the source filing is fiscal 2018 second quarter, not 2017 second quarter.
- Assess whether continued store openings can offset modest gross-margin pressure from supply-chain costs.
- Review the effect of the $42.0 million Toys “R” Us site acquisition on future capital needs, store-opening cadence and returns.
- Separate recurring earnings growth from the unusually favorable tax-rate reduction and discrete stock-compensation tax benefits.
- Monitor seasonal inventory buildup, working-capital requirements and potential revolving-credit utilization in the second half of the fiscal year.
- Evaluate the impact of the new revenue-recognition and lease-accounting standards on reported liabilities, retained earnings and comparability.