Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 2, 2020, compared with May 4, 2019. The provided filing is for the first quarter of fiscal 2020, not 2019 Q1 as indicated in the request metadata. Results are unaudited and reflect a 52-week fiscal year ending January 30, 2021.
Business Context
Ollie’s operates as an extreme-value retailer of closeout, overstocked and private-label merchandise. It had 360 stores in 25 states as of May 2, 2020, supported by three distribution centers, including a new Lancaster, Texas facility that began operations in February 2020.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $349.4 million | $324.9 million | +7.5% |
| Gross profit | $140.4 million | $132.7 million | +5.7% |
| Gross margin | 40.2% | 40.9% | Down 70 bps |
| Operating income | $43.0 million | $40.8 million | +5.4% |
| Operating margin | 12.3% | 12.6% | Down 30 bps |
| Net income | $33.5 million | $38.7 million | Down 13.6% |
| Diluted EPS | $0.51 | $0.59 | Down 13.6% |
| Adjusted EBITDA | $49.7 million | $46.6 million | +6.6% |
| Operating cash flow | $41.4 million | $22.0 million | +88.3% |
Cash and cash equivalents were $119.4 million at May 2, 2020, versus $90.0 million at February 1, 2020 and $58.5 million at May 4, 2019. Capital expenditures were $12.4 million, compared with $20.1 million in the prior-year quarter. Total inventory was $343.8 million.
The company had no borrowings under its $100.0 million revolving credit facility and reported $94.9 million of borrowing availability, subject to $4.9 million of letters of credit and $0.2 million of rent reserves. Finance debt was minimal at $0.9 million, while operating lease liabilities totaled $359.7 million, including current obligations.
Material Changes Versus the Prior Comparable Period
- Net sales increased $24.5 million, driven by $34.5 million of non-comparable store sales from new locations, partly offset by a $10.0 million comparable-store sales decline.
- Comparable-store sales decreased 3.3%, versus a 0.8% increase in the prior-year quarter. Transactions declined, while average transaction size increased.
- The sales mix shifted toward consumables and other non-discretionary products, which generally carry lower margins. The new Lancaster distribution center also increased supply-chain costs, reducing gross margin by 70 basis points.
- SG&A increased 7.7% to $89.7 million. COVID-19-related premium pay totaled $1.5 million, while cleaning and safety costs also increased. SG&A remained 25.7% of sales.
- Pre-opening expenses fell to $3.7 million from $5.2 million. The company opened 17 stores and closed two, compared with 21 openings and no closures in the prior-year quarter.
- Net income declined primarily because the effective tax rate rose to 22.3% from 5.4%. Excess tax benefits from stock-based compensation were $1.2 million versus $8.1 million in the prior-year quarter.
- Operating cash flow increased substantially, helped by more favorable working-capital movements, particularly inventory. Investing cash use declined because the prior-year period included significant construction spending for the Texas distribution center.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 47 to 49 stores during fiscal 2020, although COVID-19 could delay construction and permitting. The filing does not provide a full-year sales or earnings outlook.
- Management stated that cash, 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.
- COVID-19 caused significant sales volatility, initially reducing traffic and demand before sales improved as stores emphasized essential products and benefited from CARES Act stimulus. The company continued operating stores and distribution centers as an essential business.
- Key pandemic risks include additional operating costs, supply-chain or facility disruptions, reduced store traffic, economic recession, unemployment and uncertainty regarding the duration and severity of the pandemic. Potential effects on future operations, liquidity and financial results could be material.
- The company maintained a $100.0 million share-repurchase authorization, with $60.0 million remaining as of May 2, 2020. No additional repurchases were assured.
- A shareholder class action alleges misleading disclosures concerning earnings, projections, supply chain and inventory. The company moved to dismiss the action on May 8, 2020 and stated that it believes the case is without merit.
- Subsequent to quarter-end, the estate of former Chairman and CEO Mark Butler exercised 1.9 million vested stock options, generating $17.1 million of proceeds.
- The company reported an immaterial correction to prior-period cash-flow presentation related to a cash account that had been incorrectly classified as revolving-credit borrowings and repayments.
Important Facts for Investors to Verify
- Confirm the filing period: the document covers Q1 fiscal 2020 ended May 2, 2020, rather than Q1 fiscal 2019.
- Assess the sustainability of the 7.5% sales increase given the 3.3% comparable-store sales decline and reliance on new-store growth.
- Monitor gross-margin pressure from consumables, supply-chain costs and COVID-19-related operating expenses.
- Evaluate the effect of the materially higher effective tax rate and whether prior-year stock-compensation tax benefits were unusually large.
- Track pandemic-related changes in store traffic, merchandise mix, supply availability, labor costs, store openings and liquidity.
- Review lease obligations, revolver covenant compliance and the company’s $94.9 million of reported borrowing availability.
- Follow developments in the shareholder litigation and any related financial exposure.