Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
This filing reports the thirteen weeks ended April 30, 2016, compared with the thirteen weeks ended May 2, 2015. Although the request metadata identifies “2015 Q1,” the filing is for fiscal 2016 first quarter. Ollie’s operates a chain of extreme-value retail stores selling brand-name, closeout, overstock and private-label merchandise. The company had 208 stores in 18 states at April 30, 2016, compared with 181 stores a year earlier.
Financial performance and key metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $193.7 million | $162.5 million | +19.2% |
| Gross profit | $79.0 million | $64.0 million | +23.4% |
| Gross margin | 40.8% | 39.4% | +140 bps |
| Operating income | $21.0 million | $15.5 million | +35.5% |
| Operating margin | 10.8% | 9.6% | +120 bps |
| Net income | $11.7 million | $6.7 million | +76.4% |
| Net margin | 6.1% | 4.1% | +200 bps |
| Diluted EPS | $0.19 | $0.13 | +46.2% |
| Adjusted EBITDA | $27.1 million | $19.7 million | +37.6% |
Comparable-store sales increased 6.0%, versus 8.8% in the prior-year quarter. Non-comparable sales increased $21.9 million, primarily reflecting 28 stores opened since the prior-year first quarter. The company opened five stores during the quarter and expects to open 28 to 32 stores during fiscal 2016.
Selling, general and administrative expense increased 19.5% to $54.8 million, or 28.3% of sales versus 28.2%. Excluding $0.9 million of secondary-offering transaction costs, SG&A increased 17.5% and declined to 27.8% of sales. Pre-opening expense was $1.2 million, compared with $1.0 million.
Net cash provided by operating activities was $0.3 million, compared with $14.5 million used in the prior-year quarter. Capital expenditures were $4.8 million, compared with $2.5 million. Financing activities provided $11.4 million, including $7.8 million from stock-option exercises and a $4.8 million excess tax benefit. Cash increased $6.9 million to $37.1 million.
At April 30, 2016, total debt was approximately $197.3 million, consisting primarily of a $198.8 million New Term Loan balance before discounts and financing fees, partly offset by the current portion classification. No revolving credit borrowings were outstanding. The company reported $98.4 million of borrowing availability under its $100 million revolving facility, subject to borrowing-base limitations. The New Credit Facilities mature January 29, 2021, and the company was in compliance with its covenants.
Material changes versus the prior comparable period
- Sales growth was driven by both 6.0% comparable-store growth and substantial new-store contributions; the store base increased 14.9% year over year.
- Gross margin expanded 140 basis points, primarily from lower distribution and transportation costs as a percentage of sales and higher merchandise margins.
- Operating and net income grew faster than sales, aided by gross-margin expansion and a $2.9 million reduction in net interest expense.
- Interest expense declined 63.6%, reflecting debt reduction following the 2015 IPO and lower borrowing costs after the January 2016 refinancing.
- The February 2016 secondary offering involved 9.1 million shares sold by existing stockholders. The company received no offering proceeds except approximately $7.5 million from option exercises and incurred approximately $0.6 million of offering-related costs.
- Inventory increased to $206.4 million from $191.6 million at May 2, 2015, while cash increased substantially from $4.1 million to $37.1 million.
Guidance, outlook, risks and unusual items
Management expects store growth to remain the primary driver of sales and profitability and plans 28 to 32 new stores in fiscal 2016. It believes cash on hand, operating cash flow and revolving-credit availability will fund planned capital expenditures, working capital and debt service over the next 12 months and the foreseeable future. The filing does not provide a detailed annual revenue or earnings guidance range.
The business is seasonal, with demand and working-capital needs generally highest before the holiday-driven fourth quarter. Management targets new stores of approximately 25,000 to 35,000 square feet, initial cash investment of approximately $1.0 million, first-year sales of approximately $3.7 million and an approximate 55% first-year cash-on-cash return, with a payback period of approximately two years.
Key risks include inventory management and consumer demand, competition, execution of new-store openings, lease availability, distribution-center disruptions, seasonal and comparable-store volatility, personnel retention, limited online retail operations, international sourcing, debt service and covenant compliance. A 1% change in interest rates would affect annualized interest expense by approximately $2.0 million on the term-loan balance at quarter-end.
Nine new store leases commenced during the quarter, with estimated future minimum payments of approximately $10.8 million. The filing states that ordinary-course legal matters are not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm that the applicable reporting period is Q1 fiscal 2016, not Q1 2015, and assess seasonality when comparing quarterly results.
- Reconcile reported debt, including the $198.8 million term-loan borrowing, current maturities, discounts and deferred financing fees.
- Evaluate whether comparable-store growth remains sustainable as the company continues rapid store expansion.
- Review inventory growth, working-capital requirements and operating cash flow, which was only marginally positive despite strong earnings.
- Review the New Credit Facilities’ variable interest rates, borrowing-base availability, covenants and restrictions on dividends or other payments.
- Assess the effect of transaction costs, stock-based compensation, pre-opening expenses and other Adjusted EBITDA add-backs on recurring profitability.
- Consider lease commitments, distribution-center expansion requirements and the company’s stated capacity to support approximately 375 to 400 stores.