Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and year-to-date periods ended July 29, 2017, compared with July 30, 2016. The supplied metadata identifies “2016 Q2,” but the filing itself is for the second quarter of fiscal 2017.
Business Context and Reporting Period
Ollie’s operates as an extreme-value retailer selling overstocked, closeout and private-label merchandise. It had 250 stores in 20 states as of July 29, 2017, supported by distribution centers in Pennsylvania and Georgia. The company opened 11 stores during the quarter and 16 during the first 26 weeks, compared with 8 and 13, respectively, in the prior-year periods.
Fiscal 2017 is a 53-week year ending February 3, 2018. Results are seasonal, with higher inventory and working-capital requirements before the holiday-heavy fourth quarter.
Key Financial Metrics
| Metric | 13 Weeks Ended July 29, 2017 | 13 Weeks Ended July 30, 2016 | 26 Weeks Ended July 29, 2017 | 26 Weeks Ended July 30, 2016 |
|---|---|---|---|---|
| Net sales | $254.6 million | $211.3 million | $482.2 million | $405.0 million |
| Gross profit | $100.2 million | $83.8 million | $193.2 million | $162.8 million |
| Gross margin | 39.4% | 39.7% | 40.1% | 40.2% |
| Operating income | $29.8 million | $22.0 million | $57.2 million | $43.0 million |
| Net income | $19.7 million | $13.1 million | $38.7 million | $24.9 million |
| Diluted EPS | $0.30 | $0.21 | $0.60 | $0.40 |
| Adjusted EBITDA | $34.9 million | $26.5 million | $67.0 million | $52.4 million |
- Quarterly sales increased 20.5%; year-to-date sales increased 19.1%.
- Quarterly comparable-store sales rose 4.5%, versus 3.5% in the prior-year quarter. Year-to-date comparable-store sales rose 3.2%, versus 4.7% in the prior-year period.
- Quarterly net income increased 50.1%; year-to-date net income increased 55.4%.
- Operating margin improved to 11.7% from 10.4% for the quarter and to 11.9% from 10.6% year to date.
- SG&A declined as a percentage of sales to 25.8% from 27.3% for the quarter and to 26.4% from 27.8% year to date, excluding prior-year transaction expenses.
Cash Flow, Debt and Liquidity
- Year-to-date operating cash flow was an outflow of $2.7 million, compared with an outflow of $1.7 million in the prior-year period, primarily because of increased inventory investment.
- Year-to-date capital expenditures were $8.7 million, compared with $10.0 million in the prior-year period.
- Cash declined to $24.8 million at July 29, 2017 from $98.7 million at January 28, 2017, mainly due to $66.3 million of term-loan repayments and working-capital investment.
- Total debt was $128.4 million, including $128.0 million under the term loan and $0.4 million of capital leases. No revolving-credit borrowings were outstanding.
- Revolving-credit availability was $97.6 million, with $2.2 million of letters-of-credit commitments and $0.2 million of rent reserves.
- The term loan carried an interest rate of 2.98% at July 29, 2017. A 1 percentage-point rate change would affect annual interest expense by approximately $1.3 million based on the outstanding balance.
- The company was in compliance with its credit-facility covenants, including a minimum fixed-charge coverage ratio of 1.1 to 1.0 and a maximum total leverage ratio of 3.5 to 1.0.
Material Changes Versus the Prior Comparable Period
- Sales growth was primarily driven by 34 new stores opened since the comparable prior-year period, with comparable-store sales also contributing positively.
- Gross margin contracted modestly because of lower merchandise margins, partly offset by lower distribution-center and transportation costs as a percentage of sales.
- Lower SG&A ratios generated operating leverage despite higher store-related payroll, occupancy and operating expenses.
- Interest expense declined following $65.0 million of voluntary term-loan prepayments during the first quarter of fiscal 2017.
- The effective tax rate decreased to 31.3% for the quarter and 28.8% year to date, principally because of discrete excess tax benefits from adopting ASU 2016-09. The filing indicates benefits of $1.9 million and $5.1 million, respectively.
- The company recorded a $0.4 million loss on extinguishment of debt year to date related to accelerated debt issuance costs and original issue discount from the term-loan prepayments.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 33 to 35 stores during fiscal 2017, compared with 16 opened through the first 26 weeks.
- Management expected cash, operating cash flow and revolving-credit availability to fund planned capital expenditures, working capital and debt service over the following 12 months.
- The company commenced 23 new leases during the first 26 weeks, with approximately $30.7 million of future minimum lease payments.
- Management identified risks related to inventory procurement and demand, consumer spending, competition, store openings, personnel, lease availability, distribution-center disruptions, seasonality, international sourcing, technology systems, regulation, leverage and covenant compliance.
- Pending litigation was described as ordinary-course litigation that management did not believe would have a material adverse effect, although outcomes could not be predicted.
- The company was evaluating the future effects of the revenue-recognition and lease-accounting standards. Management anticipated that the lease standard would result in significant right-of-use assets and lease liabilities.
- The company reported no significant changes to previously disclosed risk factors and stated that disclosure controls were effective at a reasonable assurance level.
Investor Verification Checklist
- Verify that reported earnings growth is sustainable after considering the $1.9 million quarterly and $5.1 million year-to-date discrete tax benefits.
- Assess whether comparable-store sales can remain positive as new-store growth becomes a larger proportion of total sales.
- Monitor merchandise margins, gross margin trends and inventory growth, particularly ahead of the holiday selling season.
- Reconcile cash usage with planned store openings, capital expenditures, inventory investment and future lease obligations.
- Review term-loan repayment schedules, variable-rate exposure, covenant headroom and the availability of the revolving credit facility.
- Evaluate the effect of the pending lease-accounting standard on reported assets, liabilities and leverage metrics.