Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
The filing covers the thirteen and twenty-six weeks ended July 30, 2022, compared with the corresponding periods ended July 31, 2021. Ollie’s operates as an extreme-value retailer of closeout, overstocked, and private-label merchandise. It had 449 stores in 29 states, supported by three distribution centers, at quarter-end.
The company follows a 52/53-week fiscal year. The business is seasonal, with demand generally highest in the fourth fiscal quarter because of holiday sales.
Financial performance and position
| Metric | Q2 FY2022 | Q2 FY2021 | Change |
|---|---|---|---|
| Net sales | $452.5 million | $415.9 million | 8.8% increase |
| Gross profit | $143.6 million | $163.0 million | 11.9% decrease |
| Gross margin | 31.7% | 39.2% | Down 750 basis points |
| Operating income | $16.5 million | $45.7 million | 64.0% decrease |
| Operating margin | 3.7% | 11.0% | Down 730 basis points |
| Net income | $14.1 million | $34.3 million | 58.9% decrease |
| Diluted EPS | $0.22 | $0.52 | Decrease |
| Adjusted EBITDA | $25.9 million | $54.1 million | 52.1% decrease |
| Metric | Twenty-six weeks FY2022 | Twenty-six weeks FY2021 | Change |
|---|---|---|---|
| Net sales | $859.1 million | $868.4 million | 1.1% decrease |
| Gross margin | 33.2% | 39.8% | Down 660 basis points |
| Operating income | $33.7 million | $116.9 million | 71.2% decrease |
| Net income | $26.6 million | $89.5 million | 70.3% decrease |
| Diluted EPS | $0.42 | $1.36 | Decrease |
| Adjusted EBITDA | $52.2 million | $133.3 million | 63.2% decrease |
Q2 comparable-store sales increased 1.2%, while year-to-date comparable-store sales declined 8.5%. Q2 sales growth was driven primarily by 31.9 million of additional non-comparable-store sales from new stores; comparable-store sales contributed $4.7 million. The increase in comparable sales reflected higher average transaction size, partly offset by fewer transactions.
SG&A increased 7.6% in Q2 to $118.5 million, primarily from store growth and higher wage rates, but declined slightly as a percentage of sales to 26.2%. Year-to-date SG&A increased 9.4% and rose to 27.3% of sales because of sales deleverage. Income tax rates were 15.4% for Q2 and 21.0% year to date, aided by discrete tax benefits.
Cash flow, liquidity, debt, and capital allocation
- Cash and cash equivalents were $218.0 million at July 30, 2022, compared with $247.0 million at January 29, 2022 and $444.3 million at July 31, 2021.
- Year-to-date operating cash flow was $4.0 million, down from $41.8 million in the prior-year period, primarily because of lower sales and working-capital needs.
- Year-to-date capital expenditures were $23.7 million, compared with $17.7 million in the prior-year period. Total investing cash outflow was $23.5 million.
- Year-to-date financing cash outflow was $9.4 million, including $10.0 million for share repurchases.
- The company had no borrowings under its $100.0 million revolving credit facility, $90.0 million of borrowing availability, $9.8 million of outstanding letters of credit, and $0.2 million of rent reserves.
- Debt consisted principally of finance leases: $1.4 million of current and long-term debt combined. Operating lease liabilities totaled $445.8 million, including $47.3 million of minimum payments for signed but not yet commenced leases.
- The company repurchased 238,485 shares for $10.0 million during the first half, with approximately $170.0 million remaining under the authorization.
Material changes versus the prior comparable period
- Sales increased in Q2 because of new-store expansion and modest positive comparable-store sales, but first-half sales declined as the prior-year period benefited from stronger consumer spending.
- Gross margin contracted materially because of higher import transportation, supply-chain, and labor costs, together with a slight Q2 decline in merchandise margin.
- Profitability declined substantially despite SG&A controls. Q2 operating margin fell to 3.7% from 11.0%, and first-half net income fell 70.3%.
- Store growth continued: 11 stores opened in Q2 and 20 opened year to date, while two stores closed year to date. The company ended the quarter with 449 stores versus 409 a year earlier.
- Inventory increased to $494.1 million from $467.3 million at fiscal year-end and $373.6 million a year earlier, reflecting store growth and preparation for seasonal demand.
Guidance, outlook, commentary, and risks
Management expected to open an additional 21 to 23 stores during the remainder of fiscal 2022, for approximately 41 to 43 new stores for the full year, including two relocations. The company also planned a 200,000-square-foot expansion of its York, Pennsylvania distribution center, expected to add capacity for approximately 50 stores upon completion.
Management stated that cash on hand, operating cash flow, and revolver availability were expected to fund planned capital expenditures, working capital, debt service, and other financing needs for the next 12 months. No specific revenue, earnings, or margin guidance was provided in the filing text.
Key risks include continuing labor pressures, higher import and trucking costs, supply-chain disruption, COVID-19 resurgence, inflation, weaker consumer spending, inventory procurement and demand forecasting, competition, store-opening and construction delays, lease obligations, seasonal working-capital requirements, and dependence on physical stores. Management noted that the future impact of COVID-19 and inflation remains uncertain and could be material.
The company was in compliance with its credit facility covenants and reported no material off-balance-sheet arrangements. Ordinary-course litigation was not expected to have a material adverse effect, although outcomes cannot be predicted.
Most important facts to verify
- Whether supply-chain, transportation, labor, and import costs continue to pressure gross margin.
- Whether comparable-store sales remain positive and transaction traffic recovers.
- Execution of the planned 41-to-43-store fiscal 2022 expansion and York distribution-center project.
- Inventory levels, markdown exposure, and holiday-season working-capital requirements.
- Operating cash-flow recovery relative to capital expenditures and share repurchases.
- Available revolver capacity, covenant compliance, and the company’s substantial operating lease commitments.
- The filing’s use of Adjusted EBITDA, a non-GAAP measure, and the reconciliation to GAAP net income.