Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen weeks ended April 29, 2017, compared with the thirteen weeks ended April 30, 2016. Ollie’s operates extreme-value retail stores selling closeout, overstocked, private-label and name-brand merchandise. The company had 239 stores in 20 states at April 29, 2017, supported by two distribution centers. The business is seasonal, with demand generally highest in the fourth fiscal quarter.
The filing metadata references “2016 Q1,” but the filing itself is the first quarter of fiscal 2017.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $227.6 million | $193.7 million | 17.5% increase |
| Gross profit | $92.9 million | $79.0 million | 17.6% increase |
| Gross margin | 40.8% | 40.8% | Flat |
| Operating income | $27.3 million | $21.0 million | 30.3% increase |
| Operating margin | 12.0% | 10.8% | Improved |
| Net income | $19.0 million | $11.7 million | 61.4% increase |
| Diluted EPS | $0.29 | $0.19 | Increase |
| Adjusted EBITDA | $32.1 million | $25.9 million | 24.0% increase |
SG&A increased 12.6% to $61.7 million, while SG&A declined to 27.1% of sales from 28.3%. Pre-opening expenses increased to $1.6 million from $1.2 million. Net interest expense decreased to $1.3 million from $1.7 million. The effective tax rate declined to 25.9% from 39.2%, principally because adoption of ASU 2016-09 produced a $3.2 million discrete tax benefit.
Cash and cash equivalents were $33.7 million at April 29, 2017, compared with $98.7 million at January 28, 2017 and $37.1 million at April 30, 2016. Inventories were $246.6 million, compared with $210.1 million at fiscal year-end and $206.4 million in the prior-year quarter.
Operating activities generated $1.9 million of cash, investing activities used $2.9 million, and financing activities used $63.9 million. The financing outflow primarily reflected $65.0 million of voluntary term-loan prepayments. Capital expenditures were $3.0 million, compared with $4.8 million in the prior-year quarter.
Total debt was $128.2 million, including $128.0 million under the term loan and $0.3 million of capital leases. The company had no revolving-credit borrowings, approximately $97.8 million of revolver availability, $2.0 million of letters of credit and $0.2 million of rent reserves. The term-loan interest rate was 2.74% at April 29, 2017. The company was in compliance with its credit-facility covenants.
Material changes versus the prior comparable period
- Sales growth was driven primarily by non-comparable stores, which contributed a $30.6 million increase; comparable-store sales increased 1.7%, versus 6.0% in the prior-year quarter.
- The company opened five stores in each period, increasing the store count to 239 from 208.
- Gross margin remained stable at 40.8%; decreased merchandise margins were offset by lower distribution-center and transportation costs as a percentage of sales.
- Operating leverage improved as SG&A grew more slowly than sales, excluding approximately $0.9 million of prior-year secondary-offering costs.
- Net income benefited from higher operating income, lower interest expense and the discrete tax benefit associated with ASU 2016-09.
- Debt declined substantially following the $65.0 million voluntary term-loan repayment. The company recorded a $0.4 million loss on extinguishment of debt from accelerated financing costs and original issue discount.
- Inventory increased materially, contributing to limited operating cash flow despite higher earnings.
Guidance, outlook, risks and unusual items
Management expected to open 33 to 35 new stores during fiscal 2017, including the five opened during the quarter. Management stated that cash on hand, operating cash flow and revolver availability should fund planned capital expenditures, working capital and debt service over the next 12 months and the foreseeable future.
Management identified store growth, comparable-store performance, merchandise availability, inventory management, consumer spending, competition, lease terms, distribution-center operations, personnel, marketing execution, seasonality, international sourcing, regulatory changes and debt-service requirements as important risks. A 1.0% change in interest rates would affect annual interest expense by approximately $1.3 million based on term-loan balances at quarter-end.
Twelve new store leases commenced during the quarter, with initial future minimum lease payments totaling approximately $16.5 million. The company also expects the adoption of the new lease standard to create significant right-of-use assets and lease liabilities. Ordinary-course litigation was not expected to have a material adverse effect. There were no significant changes to previously disclosed risk factors.
Unusual or nonrecurring items included the $3.2 million discrete tax benefit from ASU 2016-09, the $0.4 million debt-extinguishment loss, and approximately $0.9 million of prior-year transaction expenses related to the secondary offering.
Important facts for investors to verify
- Confirm that sales growth is sustainable beyond new-store additions and monitor the decline in comparable-store sales growth to 1.7%.
- Assess inventory growth, inventory productivity and seasonal working-capital needs, particularly before the holiday selling period.
- Verify the company’s ability to fund 33 to 35 planned store openings while maintaining liquidity after significant debt prepayments.
- Review term-loan covenants, variable-rate exposure, maturity terms and remaining revolver availability.
- Separate recurring earnings performance from the $3.2 million tax benefit and the prior-year secondary-offering expense.
- Evaluate the future balance-sheet impact of operating leases and the company’s continued access to favorable closeout merchandise.