Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: The supplied filing is for the thirteen and thirty-nine weeks ended November 2, 2019, compared with the corresponding periods ended November 3, 2018. The request metadata identifies “2018 Q3,” but the filing is the fiscal 2019 third-quarter report. Results are unaudited.
Business context and reporting period
Ollie’s operates as an extreme-value retailer of overproduced, overstocked and closeout merchandise, supplemented by private-label products. It operated 345 stores in 25 states as of November 2, 2019, supported by two distribution centers and a planned third facility in Lancaster, Texas. The company opened 13 stores during the quarter and 42 stores year to date. Its business is seasonal, with generally higher demand and working-capital needs in the fourth quarter.
Financial performance and key metrics
| Metric | Q3 2019 | Q3 2018 | YTD 2019 | YTD 2018 |
|---|---|---|---|---|
| Net sales | $327.0 million | $283.6 million | $985.8 million | $847.4 million |
| Net sales growth | 15.3% | 16.3% | ||
| Gross profit | $133.3 million | $115.4 million | $390.0 million | $340.9 million |
| Gross margin | 40.8% | 40.7% | 39.6% | 40.2% |
| Operating income | $35.7 million | $29.3 million | $107.3 million | $100.1 million |
| Operating margin | 10.9% | 10.3% | 10.9% | 11.8% |
| Net income | $27.0 million | $24.8 million | $90.8 million | $85.1 million |
| Diluted EPS | $0.41 | $0.38 | $1.38 | $1.29 |
| Adjusted EBITDA | $42.6 million | $34.7 million | $126.7 million | $116.0 million |
- Quarterly net income increased 8.6%, while year-to-date net income increased 6.7%. Quarterly adjusted EBITDA increased 22.5%; year-to-date adjusted EBITDA increased 9.2%.
- Comparable-store sales declined 1.4% in the quarter and 0.8% year to date, versus increases of 4.6% and 3.6%, respectively, in the prior-year periods. Sales growth was primarily driven by new stores and non-comparable sales.
- SG&A increased 15.4% in the quarter and 16.7% year to date. SG&A remained 27.7% of sales in the quarter and increased to 26.5% from 26.4% year to date.
- Cash provided by operating activities was $14.3 million year to date, down from $46.9 million, primarily because of higher inventory and other working-capital requirements associated with store growth and seasonal inventory build.
- Capital expenditures were $64.5 million year to date, compared with $62.7 million in the prior-year period. Net cash used in investing activities was $21.8 million, benefiting from approximately $42.0 million of sale-leaseback proceeds.
- Cash and cash equivalents were $10.1 million at November 2, 2019, compared with $51.9 million at February 2, 2019. Inventory was $385.3 million, compared with $296.4 million at fiscal year-end.
Debt, liquidity and capital structure
- Total debt was $0.8 million, consisting primarily of finance leases, compared with $19.2 million at November 3, 2018. The prior term loan was fully repaid by February 2, 2019.
- The company refinanced its revolving credit facility on May 22, 2019. The facility provides $100.0 million of revolving capacity and matures May 22, 2024.
- There were no revolving borrowings at quarter end. Borrowing availability was $96.2 million, after $3.6 million of letters of credit and $0.2 million of rent reserves.
- The company repurchased 689,457 shares for $40.0 million during the quarter and year to date. Approximately $60.0 million remained under the $100.0 million authorization.
- Operating lease right-of-use assets were $330.7 million and operating lease liabilities totaled $330.2 million at quarter end. Undiscounted operating lease payments totaled $387.6 million, excluding $37.4 million for signed but unopened leases.
Material changes versus the prior comparable period
- Store count increased to 345 from 297, with 42 openings year to date versus 31 in the prior-year period.
- Comparable-store performance weakened, declining 1.4% in the quarter and 0.8% year to date.
- Year-to-date gross margin declined 60 basis points because of higher supply-chain costs and lower merchandise margin, although quarterly gross margin improved 10 basis points.
- The company adopted the new lease accounting standard on February 3, 2019, recognizing significant right-of-use assets and lease liabilities. Management reported no material effect on income, equity or cash flows.
- Liquidity benefited from substantially lower debt and the new revolving facility, but cash declined because of capital expenditures, inventory investment, share repurchases and seasonal working-capital needs.
- A May 2019 sale-leaseback of 12 former Toys “R” Us locations generated approximately $42.0 million with no net gain or loss.
Guidance, outlook, commentary and risks
The filing does not provide a clear quantitative earnings or sales guidance range. Management expects continued growth to be driven primarily by new-store openings, merchandise sourcing, customer loyalty through Ollie’s Army and disciplined expense management. The company stated that cash, operating cash flow and available revolver capacity should be adequate for planned capital expenditures, working capital, debt service and other financing needs over the next 12 months.
- Key risks include weak consumer spending, competition, inventory procurement and demand forecasting, store-opening execution, lease availability, distribution-center disruptions, supply-chain costs, tariffs and international sourcing exposure.
- The company faces seasonal working-capital pressure as it builds inventory for the holiday period and historically may use its revolver most heavily at the beginning of the fourth fiscal quarter.
- A purported shareholder class action filed in September 2019 alleges misleading statements concerning earnings, projections, supply chain and inventory. The company believes the case is without merit and does not expect current litigation to have a material adverse effect, but the outcome is uncertain.
- The revolving credit facility contains financial and business covenants, including a fixed-charge coverage ratio requirement during applicable covenant periods. The company reported compliance through November 2, 2019.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Facts investors should verify
- Confirm that the intended period is fiscal Q3 2019, not Q3 2018, because the supplied filing covers the thirteen weeks ended November 2, 2019.
- Evaluate whether continued store expansion can offset declining comparable-store sales and lower year-to-date gross margin.
- Monitor holiday-season inventory levels, operating cash flow and potential revolver usage.
- Review the economics and obligations associated with the Lancaster distribution center and the company’s operating leases.
- Assess the effect of the $40.0 million share repurchase on liquidity and remaining authorization.
- Follow developments in the shareholder litigation and any related effects on disclosures, reputation or financial results.