Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 1, 2021, compared with May 2, 2020. The request metadata identifies “2020 Q1,” but the filing is for the first quarter of fiscal 2021. Results are unaudited. Ollie’s operates as an extreme-value retailer of closeout, overstocked, private-label and other discounted merchandise, with 397 stores in 25 states at period-end.
Financial Performance and Position
| Metric | Q1 Fiscal 2021 | Q1 Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $452.5 million | $349.4 million | 29.5% increase |
| Gross profit | $182.6 million | $140.4 million | 30.1% increase |
| Gross margin | 40.4% | 40.2% | 20 basis-point increase |
| Operating income | $71.2 million | $43.0 million | 65.7% increase |
| Operating margin | 15.7% | 12.3% | 340 basis-point increase |
| Net income | $55.2 million | $33.5 million | 65.1% increase |
| Diluted EPS | $0.84 | $0.51 | Increase |
| Adjusted EBITDA | $79.2 million | $49.7 million | 59.2% increase |
| Net cash from operating activities | $40.1 million | $41.4 million | Decrease |
Comparable-store sales increased 18.8%, versus a 3.3% decrease in the prior-year quarter. Non-comparable sales increased $40.7 million, supported by new-store growth and strong new-store performance. Average net sales per store increased to $1.15 million from $0.99 million.
- SG&A increased 16.3% to $104.4 million, but declined to 23.1% of sales from 25.7%, reflecting operating leverage and expense controls.
- Pre-opening expenses declined to $2.5 million from $3.7 million; the company opened 11 stores and closed two relocated stores, compared with 17 openings and two closures in the prior year.
- The effective tax rate was 22.5%, compared with 22.3%. The periods included excess tax benefits from stock-based compensation of $2.1 million and $1.2 million, respectively.
- Cash and cash equivalents were $472.2 million at May 1, 2021, up from $447.1 million at January 30, 2021 and $119.4 million at May 2, 2020.
- Total liabilities were $656.8 million and stockholders’ equity was $1.39 billion at May 1, 2021.
- Debt was minimal: $0.9 million of current and long-term finance-lease debt, with no borrowings under the revolving credit facility.
Cash Flow, Liquidity and Capital Allocation
- Operating cash flow was $40.1 million. Investing cash outflow was $9.4 million, primarily capital expenditures, compared with $12.4 million in the prior year.
- Financing cash outflow was $5.7 million, primarily reflecting $9.6 million of share repurchases, partly offset by $5.3 million of stock-option exercise proceeds.
- Cash increased $25.0 million during the quarter to $472.2 million.
- The $100 million revolving credit facility matures May 22, 2024. The company reported $91.1 million of borrowing availability, $8.7 million of letters of credit and $0.2 million of rent reserves.
- Management believes cash, operating cash flow and revolver availability will fund planned capital expenditures, working capital, debt service and other financing needs for at least the next 12 months.
- The company repurchased 110,622 shares for $9.6 million during the quarter. After a subsequent May repurchase of $20.0 million for 251,948 shares, $170.4 million remained under the authorization.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated substantially, driven by an 18.8% comparable-store increase and additional stores.
- Management attributed part of the sales benefit to increased consumer spending from the third round of federal COVID-19 relief funds.
- Gross margin improved modestly because of better merchandise margins, partly offset by higher transportation and supply-chain costs.
- Operating and net margins expanded materially because sales growth outpaced SG&A growth and pre-opening costs declined.
- Operating cash flow was slightly lower despite higher earnings, primarily because of increased working-capital needs, including changes in accounts payable and accrued liabilities.
- The company began repurchasing shares during the quarter, whereas no repurchases occurred in the prior-year quarter.
Outlook, Commentary, Risks and Unusual Items
- Management expected to open approximately 50 stores during fiscal 2021. Distribution capabilities were described as supporting approximately 500 to 600 stores over the next several years.
- COVID-19 continued to create labor pressures and supply-chain disruptions. Management stated that these issues were manageable through the quarter but could materially affect future operations, liquidity and financial results.
- New-store construction and permitting could be delayed by COVID-19-related conditions.
- The business is seasonal, with demand generally highest in the fourth fiscal quarter; interim results are not necessarily indicative of full-year performance.
- Operating leases represented significant fixed commitments: $451.1 million of undiscounted payments, including $40.6 million for signed but not yet commenced leases. A separate marketing agreement requires $23.0 million of guaranteed spending through May 28, 2022.
- Management identified risks relating to inventory procurement, consumer spending, competition, imported merchandise and transportation, labor availability, distribution-center disruptions, leases, information systems, civil unrest, litigation, regulation and the lack of a significant online retail presence.
- A previously disclosed shareholder securities class action was dismissed with prejudice-related case closure on February 10, 2021. Management stated that current claims are not expected to have a material adverse effect, although litigation outcomes remain uncertain.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify the filing period: this Form 10-Q covers fiscal Q1 2021, not fiscal Q1 2020.
- Assess how much of the 29.5% sales increase and 18.8% comparable-store growth was stimulus-driven and whether demand is sustainable after stimulus effects fade.
- Monitor transportation costs, labor availability, supply-chain disruptions and their potential effect on gross margin.
- Reconcile the decline in operating cash flow with higher earnings and track seasonal working-capital requirements.
- Evaluate the planned pace and economics of approximately 50 new stores, including construction and permitting risks.
- Review the $200 million share-repurchase authorization, subsequent repurchases and the effect on cash balances and share count.
- Consider total fixed obligations, including operating leases, lease commitments not yet commenced and the marketing-spend commitment.
- Review the company’s full risk-factor disclosure and the terms, availability and covenant requirements of the revolving credit facility.