Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended October 30, 2021, compared with October 31, 2020. The filing is for fiscal 2021 third quarter, although the request metadata identifies “2020 Q3.” Results are unaudited and seasonal.
Business Context
Ollie’s is an extreme-value retailer of overstocked, closeout and private-label merchandise. It operated 426 stores in 29 states at October 30, 2021, supported by three distribution centers. The company opened 18 stores in the quarter and 41 stores year to date, compared with 19 and 42, respectively, in the prior comparable periods.
Financial Performance
| Metric | Q3 FY2021 | Q3 FY2020 | YTD FY2021 | YTD FY2020 |
|---|---|---|---|---|
| Net sales | $383.5 million | $414.4 million | $1.252 billion | $1.293 billion |
| Gross profit | $152.6 million | $171.5 million | $498.2 million | $518.7 million |
| Gross margin | 39.8% | 41.4% | 39.8% | 40.1% |
| Operating income | $30.2 million | $57.8 million | $147.1 million | $192.8 million |
| Net income | $23.2 million | $45.2 million | $112.7 million | $178.0 million |
| Diluted EPS | $0.36 | $0.68 | $1.72 | $2.71 |
| Adjusted EBITDA | $37.9 million | $65.3 million | $171.2 million | $214.4 million |
Third-quarter net sales declined 7.5%, gross profit declined 11.0%, operating income declined 47.7%, net income declined 48.7%, and Adjusted EBITDA declined 41.9%. Year-to-date net sales decreased 3.2%, net income decreased 36.7%, and Adjusted EBITDA decreased 20.1%.
Comparable store sales decreased 15.5% in the quarter and 11.3% year to date, versus increases of 15.3% and 18.6% in the prior-year periods. New-store sales partially offset the comparable-store decline.
SG&A increased 7.8% in both the quarter and year-to-date period, reaching $114.0 million and $328.5 million, respectively. SG&A increased to 29.7% of sales in the quarter from 25.5% and to 26.2% year to date from 23.6%, reflecting sales deleveraging, store growth and higher wage rates.
Cash Flow, Liquidity and Capital Structure
- Year-to-date operating cash flow was $2.7 million, down from $235.9 million, primarily because of higher working capital needs and lower sales.
- Inventory was $471.8 million at October 30, 2021, up from $394.9 million at October 31, 2020 and $353.7 million at January 30, 2021, reflecting seasonal holiday inventory buildup and supply-chain conditions.
- Capital expenditures were $29.6 million year to date, compared with $25.9 million in the prior-year period.
- Cash and cash equivalents were $229.7 million, compared with $325.5 million at October 31, 2020 and $447.1 million at January 30, 2021.
- The company had no borrowings under its $100.0 million revolving credit facility and reported $86.4 million of borrowing availability, $13.4 million of outstanding letters of credit and $0.2 million of rent reserves.
- Debt consisted primarily of finance leases, with $1.1 million of current and long-term debt outstanding. Operating lease liabilities totaled $418.2 million, including $344.3 million long term.
- The company repurchased 2.68 million shares for approximately $200.0 million during the first thirty-nine weeks, reducing cash and treasury stock. Approximately $33,000 remained under the authorization at October 30, 2021.
Material Changes and Unusual Items
- Gross margin declined 160 basis points in the quarter and 30 basis points year to date, primarily from higher import, trucking and distribution-center wage costs, partly offset by improved merchandise margin.
- Prior-year sales benefited from COVID-related stimulus, elevated retail spending and demand for personal protective equipment, cleaning supplies and home-related products. Those benefits did not recur in 2021.
- Year-to-date tax expense increased to $34.3 million from $15.0 million. The prior-year effective tax rate benefited from a $33.8 million discrete tax benefit related primarily to stock-option exercises by the estate of a former executive. The 2021 year-to-date effective tax rate was 23.3% versus 7.8%.
- Third-quarter and year-to-date SG&A included a $0.3 million gain from an insurance settlement.
- On November 30, 2021, after quarter end, the board authorized an additional $200.0 million share-repurchase program expiring December 15, 2023.
Outlook, Risks and Contingencies
- Management expected to open 46 stores during fiscal 2021 and stated that distribution capacity could support approximately 500 to 600 stores over the next several years.
- The company planned a 200,000-square-foot expansion of its York, Pennsylvania distribution center in fiscal 2022.
- Management stated that cash, operating cash flow and revolving-credit availability should fund planned capital expenditures, working capital, debt service and other financing activities for the next 12 months, but additional financing could be required if those sources are insufficient.
- COVID-19 continued to create labor pressures, supply-chain disruptions, higher import and trucking costs and uncertainty regarding consumer demand. Management could not reasonably estimate the pandemic’s future financial impact.
- Potential vaccine or testing mandates could increase labor costs, employee attrition and operational disruption.
- Key risks include inventory procurement and demand forecasting, inflation and transportation costs, consumer spending, competition, store expansion, lease availability, distribution-center interruptions, labor availability, cybersecurity, litigation, seasonality and the absence of a significant online retail operation.
- The company reported no material off-balance-sheet arrangements and does not believe current litigation will have a material adverse effect.
Investor Verification Items
- Verify the period designation: the filing covers fiscal 2021 third quarter, not fiscal 2020 third quarter.
- Assess whether comparable-store sales and transaction trends improve after the unusually strong COVID-affected prior-year comparison.
- Monitor inventory levels, markdowns, gross margin and operating cash flow as supply-chain and holiday-season risks develop.
- Reconcile the $200.0 million repurchase, the minimal remaining authorization at quarter end and the subsequent $200.0 million authorization with future cash balances and liquidity.
- Evaluate the effect of labor pressures, potential vaccine mandates, import and trucking costs, and the planned distribution-center expansion on margins and capital expenditures.
- Confirm the company’s ability to maintain covenant compliance and adequate liquidity despite substantial operating lease obligations and seasonal working-capital requirements.