Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarterly report filed December 10, 2015, covering the thirteen and thirty-nine weeks ended October 31, 2015, compared with October 31, 2014 and November 1, 2014, respectively. The request metadata identifies “2014 Q3,” but the filing is clearly for third quarter fiscal 2015.
Business Context and Reporting Period
Ollie’s operates a closeout and extreme-value retail chain selling branded, overstocked, overproduced and private-label merchandise. The company had 200 stores in 17 states at October 31, 2015, versus 173 stores a year earlier. It operates two distribution centers and reports one operating segment.
The business is seasonal, with peak demand generally occurring in the fourth fiscal quarter during the holiday season. Inventory and working-capital needs typically rise in the third and fourth quarters.
Financial Performance and Key Metrics
| Metric | Q3 2015 | Q3 2014 | Year-to-date 2015 | Year-to-date 2014 |
|---|---|---|---|---|
| Net sales | $174.6 million | $150.0 million | $519.0 million | $437.3 million |
| Gross profit | $69.9 million | $59.6 million | $204.0 million | $174.2 million |
| Gross margin | 40.1% | 39.7% | 39.3% | 39.8% |
| Operating income | $13.9 million | $12.6 million | $46.3 million | $38.7 million |
| Net income | $6.8 million | $4.9 million | $19.8 million | $14.9 million |
| Diluted EPS | $0.11 | $0.10 | $0.37 | $0.31 |
| Adjusted EBITDA | $20.0 million | $16.9 million | $62.2 million | $52.4 million |
Third-quarter sales increased 16.4%, driven by a 3.2% comparable-store sales increase and higher non-comparable sales from store expansion. Year-to-date sales increased 18.7%, including a 6.5% comparable-store sales increase.
Third-quarter gross margin expanded 33 basis points, while year-to-date gross margin declined 52 basis points due primarily to higher distribution-center costs. Third-quarter operating margin was 8.0%, compared with 8.4% in the prior-year period; year-to-date operating margin was 8.9%, compared with 8.8%.
Third-quarter net income rose 39.4%, and year-to-date net income rose 32.7%. The effective tax rate was 36.5% for the quarter and 37.5% year to date, versus 38.4% in the comparable prior-year periods, partly reflecting employment-based tax credits and a lower projected state effective tax rate.
Cash Flow, Liquidity and Debt
- Cash at October 31, 2015 was $4.0 million, compared with $3.3 million at November 1, 2014 and $22.0 million at January 31, 2015.
- Year-to-date operating cash flow was negative $15.4 million, compared with negative $12.2 million in the prior-year period, primarily because of inventory and other working-capital investments.
- Year-to-date investing cash flow was negative $10.9 million, including $10.9 million of capital expenditures.
- Year-to-date financing cash flow was positive $8.3 million and included IPO proceeds, debt repayments, a $48.8 million cash dividend and revolving-credit activity.
- Total debt at October 31, 2015 was approximately $230.5 million, consisting of $212.4 million of term loan and capital-lease debt plus $18.1 million outstanding under the revolving credit facility.
- The revolving facility had a $125.0 million commitment, $103.4 million of availability, $3.3 million of letters-of-credit commitments and $0.2 million of rent reserves.
- The company stated that it was in compliance with all debt agreement terms and financial covenants.
Material Changes Versus the Prior Comparable Period
- Store count increased 15.6% to 200 stores from 173 stores. The company opened 13 stores in the quarter and 25 stores year to date, while closing one store year to date.
- Comparable-store sales growth moderated to 3.2% in the quarter from 6.2% in the prior-year quarter, but increased to 6.5% year to date from 2.4%.
- SG&A increased 17.5% in the quarter, partly due to new-store expenses and public-company costs. SG&A as a percentage of sales increased 30 basis points in the quarter but declined 46 basis points year to date.
- Pre-opening expenses increased to $2.4 million in the quarter and $5.3 million year to date, reflecting the higher number of store openings.
- Interest expense declined 30.8% in the quarter and 10.9% year to date following debt reduction funded with IPO proceeds.
- The July 2015 IPO issued 10,263,750 shares at $16.00 per share and generated approximately $153.1 million of net proceeds. The proceeds were used to repay revolving debt and approximately $103.1 million of term-loan principal.
- Year-to-date loss on extinguishment of debt increased to $2.4 million from $0.7 million due to write-offs of debt issuance costs and original issue discount associated with the IPO-related debt repayment.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 28 stores and close one store in fiscal 2015; 25 stores had opened and one had closed through October 31, with three additional openings planned for the remainder of the year.
- Fiscal 2015 capital expenditures were expected to be approximately $14.0 million, with approximately half allocated to new-store openings. The company had spent $10.9 million year to date.
- Management stated that cash on hand, operating cash flow and revolving-credit availability should be sufficient for planned capital expenditures, working capital and debt service over the next 12 months and foreseeable future.
- New-store leases commenced for 27 locations during the first 39 weeks, with future minimum lease payments of approximately $30.6 million. Initial lease terms are generally five to seven years.
- Key risks include inventory management and consumer demand, competition, comparable-store sales volatility, store-opening execution, personnel retention, lease availability, distribution-center disruptions, seasonality, international sourcing, online-retail limitations, debt service and compliance with financial covenants.
- Legal claims arise in the ordinary course of business; management did not expect current matters to have a material adverse effect. No significant changes to previously disclosed risk factors were reported.
- Goodwill and the tradename passed qualitative impairment assessments as of October 31, 2015, with no impairment recorded.
- The company had not selected a transition method for the then-new revenue-recognition standard and was evaluating its impact.
Most Important Facts for Investors to Verify
- Confirm that the applicable period is fiscal Q3 2015, not Q3 2014, and review the filing’s unaudited status.
- Assess whether sales growth remains dependent primarily on new-store openings and whether comparable-store growth moderates further.
- Monitor inventory growth, negative year-to-date operating cash flow and seasonal fourth-quarter working-capital requirements.
- Verify debt balances, variable interest-rate exposure, covenant compliance and the $103.4 million of reported revolving-credit availability.
- Evaluate the effect of distribution-center costs on gross margin and the company’s ability to scale its infrastructure.
- Review the $30.6 million of future minimum payments from new store leases and other expansion commitments.
- Consider dilution from the IPO and outstanding options; 7,266,125 options were outstanding at October 31, 2015.