Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 4, 2019, compared with thirteen weeks ended May 5, 2018. The source metadata identifies “2018 Q1,” but the filing is the first-quarter 2019 Form 10-Q. Results are unaudited and seasonally affected.
Business Context
Ollie’s operates an extreme-value retail business selling overstocked, overproduced and closeout merchandise, supplemented by private-label products. The company had 324 stores in 23 states as of May 4, 2019, supported by two distribution centers. It opened 21 stores during the quarter, compared with eight in the prior-year quarter.
Financial Performance and Liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $324.9 million | $275.7 million | 17.8% increase |
| Gross profit | $132.7 million | $112.9 million | 17.6% increase |
| Gross margin | 40.9% | 40.9% | Flat |
| Operating income | $40.8 million | $36.0 million | 13.3% increase |
| Operating margin | 12.6% | 13.1% | Down 50 basis points |
| Net income | $38.7 million | $30.5 million | 27.1% increase |
| Diluted EPS | $0.59 | $0.46 | Increase |
| Adjusted EBITDA | $46.6 million | $41.0 million | 13.7% increase |
| Adjusted EBITDA margin | 14.4% | 14.9% | Down approximately 50 basis points |
Comparable-store sales increased 0.8%, versus 1.9% in the prior-year quarter. Net sales growth was primarily driven by $47.0 million of non-comparable store sales from recently opened stores. Average net sales per store increased to approximately $1.032 million from $1.011 million.
SG&A increased 15.2% to $83.3 million, partly reflecting store growth and higher sales volume. SG&A included a $0.6 million insurance settlement gain; excluding that gain, SG&A increased 15.9%. Pre-opening expenses rose 195.3% to $5.2 million due to the greater number and timing of store openings.
Net interest income was $0.1 million, compared with $0.5 million of net interest expense in the prior-year period, reflecting repayment of the term loan during 2018. The effective tax rate declined to 5.4% from 13.8%, primarily because of higher excess tax benefits from stock-based compensation. These benefits were $8.1 million in 2019 versus $3.9 million in 2018.
Net cash provided by operating activities was $22.0 million, compared with $15.3 million. Capital expenditures were $20.1 million, compared with $4.7 million, including approximately $10.1 million for construction of the third distribution center. Cash increased by $6.6 million to $58.5 million during the quarter.
As of May 4, 2019, the company had $610,000 of total debt, consisting primarily of finance leases, no borrowings under its revolving credit facility, and $98.1 million of revolving borrowing availability. The facility had $1.6 million of letters of credit and $0.3 million of rent reserves. The company was in compliance with its credit facility covenants.
Material Changes Versus the Prior Comparable Period
- Sales growth accelerated in dollars but was predominantly attributable to new stores; comparable-store sales growth moderated to 0.8% from 1.9%.
- Store count increased to 324 from 276, with 21 openings versus eight in the prior-year quarter.
- Gross margin remained stable at 40.9%, while operating and Adjusted EBITDA margins declined because of higher pre-opening costs and growth-related expenses.
- Net income benefited materially from a lower effective tax rate and reduced interest costs.
- Capital expenditures increased substantially because of new stores and the third distribution center.
- The company adopted the new lease accounting standard on February 3, 2019, recognizing $273.1 million of operating lease right-of-use assets and $273.9 million of operating lease liabilities as of May 4, 2019. The adoption materially increased reported assets and liabilities but did not materially affect earnings or cash flow.
Guidance, Outlook, Risks and Unusual Items
Management expected to open 42 to 44 stores during fiscal 2019 and planned continued investment in stores, distribution centers, store resets and information technology. Management stated that cash on hand, operating cash flow and revolving-credit availability were expected to fund planned capital expenditures, working capital and debt service over the following 12 months.
On May 22, 2019, after quarter-end, the company amended and restated its revolving credit facility. The new $100.0 million facility matures May 22, 2024 and permits additional term-loan or revolving commitments subject to specified conditions. On May 31, 2019, the company completed a sale-leaseback involving 12 former Toys “R” Us locations and received approximately $42 million in cash.
Key risks include merchandise procurement and demand forecasting, consumer spending and discretionary income, competition, successful store expansion, lease availability and costs, distribution-center execution, seasonal working-capital requirements, limited online retail operations, tariffs and international sourcing, information-technology risks, litigation, and compliance with debt covenants. The company disclosed no significant changes to previously reported risk factors and stated that current legal matters were not expected to have a material adverse effect.
Unusual or nonrecurring items included the $0.6 million insurance settlement gain, higher excess tax benefits from stock-based compensation, the debt repayment-related reduction in interest expense, and elevated pre-opening expenses associated with 21 new stores.
Investor Verification Items
- Verify that sales growth continues to be supported by profitable new-store productivity rather than only store-count expansion.
- Monitor comparable-store sales, which slowed to 0.8%, and assess trends by merchandise category.
- Evaluate whether operating-margin pressure from pre-opening costs, occupancy and store growth moderates as the new stores mature.
- Review the cash requirements and execution timetable for the third distribution center and planned store openings.
- Separate recurring earnings performance from the unusually low 5.4% effective tax rate and the insurance settlement gain.
- Assess the economic effect of the large operating lease portfolio, including $273.9 million of recorded lease obligations and $31.8 million of minimum payments for signed but not yet commenced leases.
- Confirm covenant compliance, revolving-credit availability and the terms of the post-quarter-end amended credit agreement.