Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended October 28, 2023, compared with October 29, 2022. The request metadata identifies “2022 Q3,” but the filing is the third-quarter fiscal 2023 Form 10-Q. The financial statements are unaudited. Ollie’s operated 505 stores in 30 states at period-end, versus 463 stores a year earlier.
Business Context and Reporting Period
Ollie’s is an extreme-value retailer specializing in overproduced, overstocked and closeout merchandise, supplemented by private-label products. The company opened 23 stores during the quarter and 38 stores year to date. It opened its 500th store in Iowa City, Iowa, entering its 30th state.
The business is seasonal, with demand generally highest in the fourth fiscal quarter during the holiday season. Fiscal 2023 is a 53-week year ending February 3, 2024.
Key Financial Metrics
| Metric | Q3 Fiscal 2023 | Q3 Fiscal 2022 | Year-to-Date Fiscal 2023 | Year-to-Date Fiscal 2022 |
|---|---|---|---|---|
| Net sales | $480.1 million | $418.1 million | $1.454 billion | $1.277 billion |
| Gross profit | $194.1 million | $164.7 million | $569.4 million | $449.6 million |
| Gross margin | 40.4% | 39.4% | 39.2% | 35.2% |
| Operating income | $39.1 million | $29.5 million | $130.1 million | $63.2 million |
| Operating margin | 8.1% | 7.1% | 9.0% | 4.9% |
| Net income | $31.8 million | $23.1 million | $105.0 million | $49.7 million |
| Net margin | 6.6% | 5.5% | 7.2% | 3.9% |
| Diluted EPS | $0.51 | $0.37 | $1.69 | $0.79 |
| Adjusted EBITDA | $51.1 million | $39.5 million | $164.6 million | $91.7 million |
Sales drivers: Comparable-store sales increased 7.0% in the quarter and 6.5% year to date. Management attributed the increases to higher transaction counts and average transaction sizes. Non-comparable store sales increased by $33.9 million in the quarter and $96.1 million year to date, primarily from new-store growth.
Cash flow and capital spending: Year-to-date operating cash flow was $110.9 million, compared with $1.0 million in the prior-year period. Capital expenditures were $81.4 million versus $38.9 million. Investing cash flow was negative $125.3 million, including $206.8 million of short-term investment purchases and $162.5 million of maturities. Financing cash flow was negative $36.6 million, including $39.8 million of share repurchases.
Liquidity: Cash and cash equivalents were $159.6 million, and short-term investments were $104.5 million, for total cash and short-term investments of $264.0 million at October 28, 2023. The company had $91.8 million of borrowing availability under its $100.0 million revolving credit facility, with no revolver borrowings outstanding.
Debt and lease obligations: Long-term debt consists primarily of finance leases, totaling approximately $1.5 million including the current portion. Operating lease liabilities totaled $487.9 million, including $94.9 million current and $393.0 million long term. Undiscounted operating lease payments totaled $557.8 million, excluding $13.0 million of commitments for leases not yet commenced.
Material Changes Versus the Prior Comparable Period
- Quarterly net sales increased 14.8%, while year-to-date sales increased 13.8%.
- Quarterly gross margin expanded 100 basis points to 40.4%; year-to-date gross margin expanded 400 basis points to 39.2%. Management cited favorable supply-chain costs and, year to date, higher merchandise margins, partly offset by shrink and merchandise mix.
- Quarterly operating income increased 32.3% to $39.1 million; year-to-date operating income more than doubled to $130.1 million.
- Quarterly net income increased 37.8%; year-to-date net income increased 111.2%.
- SG&A increased in dollars because of new-store costs and higher incentive compensation, but declined as a percentage of sales to 29.5% from 29.9% in the quarter and to 28.0% from 28.2% year to date.
- Net interest income increased to $4.0 million in the quarter and $10.1 million year to date, primarily due to higher interest rates and larger cash and investment balances.
- The effective tax rate increased to 26.1% from 24.1% in the quarter and to 25.1% from 22.5% year to date, primarily because of lower discrete tax benefits and state tax-rate changes.
- The company repurchased 634,733 shares for $39.8 million year to date, compared with 602,805 shares for $30.0 million in the prior-year period. Approximately $98.4 million remained under the authorization at quarter-end.
Guidance, Outlook, Risks and Unusual Items
Management expected to open approximately 45 stores during fiscal 2023. The company expects its Princeton, Illinois distribution center to be occupied in the first half of fiscal 2024. Including the expanded York, Pennsylvania distribution center, management believes distribution capacity will support approximately 700 to 750 stores. The filing text does not provide detailed earnings or sales guidance.
Management expects cash on hand, operating cash flow and revolver availability to fund planned capital expenditures, working capital, debt service and other financing activities over the next 12 months. Capital expenditures include new stores, remodels, distribution infrastructure, the Princeton distribution center and information-technology investments.
Key risks include consumer spending and discretionary-income pressures, inflation and wage or energy costs, inventory procurement and demand management, shrink, supply-chain disruption, tariffs, competition, store-opening execution, lease availability and costs, distribution-center execution, cybersecurity, litigation, seasonality, natural disasters, health events and compliance with credit-facility covenants.
The company was in compliance with its credit-facility terms and had no outstanding variable-rate debt at quarter-end. The credit facility matures on May 22, 2024 and includes a fixed-charge coverage covenant applicable during specified covenant periods. Current legal matters are not expected by management to have a material adverse effect, individually or in the aggregate.
On November 30, 2023, the board extended the share-repurchase authorization, previously scheduled to expire December 15, 2023, through March 31, 2026. The filing also disclosed Rule 10b5-1 sale plans adopted or modified by certain executives.
Important Facts for Investors to Verify
- Confirm the applicable reporting period: the filing covers fiscal 2023 third quarter, not fiscal 2022 third quarter.
- Assess whether gross-margin gains from supply-chain costs and merchandise margins are sustainable and how shrink may affect future results.
- Monitor holiday-season sales, inventory levels, working-capital requirements and the impact of the company’s seasonal fourth quarter.
- Evaluate the pace and economics of new-store openings, the approximately 45-store fiscal-year target and execution of the Princeton distribution center.
- Review operating lease commitments, including $557.8 million of undiscounted payments and $13.0 million for signed but unopened leases.
- Track liquidity, the May 2024 revolver maturity, covenant requirements and the use of cash for capital expenditures and share repurchases.
- Verify the effect of the extended repurchase authorization and disclosed executive Rule 10b5-1 trading plans on shares outstanding and capital allocation.