Ollie's Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: The provided filing is for the thirteen and twenty-six weeks ended July 30, 2016, compared with the periods ended August 1, 2015. The request metadata identifies “2015 Q2,” but the filing itself reports fiscal 2016 second-quarter results.
Business context
Ollie’s operates an extreme-value retail chain selling branded, overstocked, overproduced and closeout merchandise, supplemented by private-label products. As of July 30, 2016, the company operated 216 stores in 19 states, supported by two distribution centers. It opened 13 stores during the first 26 weeks of fiscal 2016 and expected to open 28 to 32 stores for the full year.
The business is seasonal, with higher demand and working-capital requirements before the holiday selling season. The interim financial statements are unaudited and are not necessarily indicative of full-year results.
Financial performance and key metrics
| Metric | 13 weeks ended July 30, 2016 | 13 weeks ended August 1, 2015 | 26 weeks ended July 30, 2016 | 26 weeks ended August 1, 2015 |
|---|---|---|---|---|
| Net sales | $211.3 million | $181.9 million | $405.0 million | $344.4 million |
| Gross profit | $83.8 million | $70.1 million | $162.8 million | $134.1 million |
| Gross margin | 39.7% | 38.5% | 40.2% | 38.9% |
| Operating income | $22.0 million | $16.8 million | $43.0 million | $32.3 million |
| Net income | $13.1 million | $6.4 million | $24.9 million | $13.0 million |
| Diluted EPS | $0.21 | $0.12 | $0.40 | $0.26 |
| Adjusted EBITDA | $28.6 million | $22.5 million | $55.7 million | $42.2 million |
- Second-quarter sales increased 16.1%; year-to-date sales increased 17.6%.
- Comparable-store sales increased 3.5% in the quarter and 4.7% year to date, compared with 7.8% and 8.3%, respectively, in the prior-year periods.
- Second-quarter operating margin was 10.4%, versus 9.3% in the prior year; year-to-date operating margin was 10.6%, versus 9.4%.
- Net interest expense declined to $1.5 million in the quarter and $3.1 million year to date, primarily because of lower borrowings and the January 2016 refinancing.
- Effective tax rates were 36.0% for the quarter and 37.5% year to date, compared with 36.9% and 38.0% in the prior-year periods.
Cash flow, liquidity and debt
- Cash used in operating activities was $1.7 million for the first 26 weeks, compared with $17.2 million in the prior-year period. Inventory investment used $25.1 million of cash.
- Capital expenditures were $10.0 million, compared with $6.0 million in the prior-year period.
- Financing activities provided $12.1 million, principally from $9.2 million of stock-option exercise proceeds and a $5.5 million related excess tax benefit.
- Cash and cash equivalents totaled $30.7 million at July 30, 2016, compared with $0.8 million at August 1, 2015.
- Total debt was approximately $196.3 million, consisting primarily of a $197.5 million New Term Loan balance, net of discounts and financing fees, partially offset by the current portion classification. The revolving facility had no borrowings.
- Revolving-credit availability was $97.6 million, subject to borrowing-base limitations, with $2.2 million of letters of credit and $0.2 million of rent reserves. The company stated that it was in compliance with its credit-facility covenants.
- Management believed cash, operating cash flow and revolving-credit availability would fund planned capital expenditures, working capital and debt service for the next 12 months and the foreseeable future.
Material changes versus the prior comparable period
- Sales growth was driven primarily by 29 stores opened since the prior-year second quarter, partially offset by one store closure, while comparable-store growth moderated from the prior year.
- Gross margin expanded by 116 basis points in the quarter and 127 basis points year to date, reflecting lower distribution and transportation costs as a percentage of sales and improved merchandise margins.
- SG&A increased 16.5% in the quarter and 17.9% year to date as the store base, sales volume and public-company infrastructure expanded. Year-to-date SG&A included approximately $1.2 million of secondary-offering-related transaction expenses.
- Prior-year results included a $2.4 million loss on extinguishment of debt and substantially higher interest expense. These items did not recur in the 2016 periods.
- The company completed secondary offerings in February and June 2016. Selling stockholders sold the shares; the company received no proceeds from the offerings themselves, except for proceeds from related stock-option exercises.
- The company adopted debt-issuance-cost presentation guidance, reducing reported debt and other assets for prior periods.
Guidance, outlook, risks and unusual items
- Management expected to open 28 to 32 stores in fiscal 2016, with new-store growth remaining the primary sales-growth driver.
- Management expects additional expenditures for distribution-center capacity, store resets, information technology and other corporate capital needs.
- New store leases commenced for 18 locations during the first 26 weeks, with future minimum lease payments of approximately $20.2 million.
- Key risks include inventory-management and consumer-demand execution, competition, comparable-store volatility, store-opening performance, lease availability, distribution-center disruptions, seasonal working-capital needs, online-retail limitations, personnel retention, international sourcing and debt-service or covenant compliance.
- Variable-rate debt creates interest-rate exposure; a 1.0% change in rates would affect annual interest expense by approximately $2.0 million based on the July 30, 2016 term-loan balance.
- Ordinary-course litigation was disclosed, but management did not expect current matters to have a material adverse effect.
- The company expected to lose emerging-growth-company status beginning January 28, 2017, increasing reporting, compliance and audit-attestation requirements and related costs.
Most important facts for investors to verify
- Confirm the reporting period: the filing is for fiscal 2016 second-quarter results, not 2015 Q2.
- Assess whether comparable-store sales can sustain growth after moderating to 3.5% in the quarter and 4.7% year to date.
- Monitor inventory growth, seasonal cash requirements and the company’s ability to convert earnings into operating cash flow.
- Verify execution against the 28-to-32-store opening plan and the returns expected from new stores.
- Review leverage, variable-rate exposure, borrowing-base availability and compliance with credit-facility covenants.
- Separate recurring operating performance from transaction expenses, stock-based compensation, pre-opening costs and other non-GAAP adjustments.
- Evaluate the future cost and control implications of losing emerging-growth-company status.