Business Context and Reporting Period
Ollie’s Bargain Outlet Holdings, Inc. operates an extreme-value retail business selling overstock, closeout and private-label merchandise. The company had 297 stores in 23 states as of November 3, 2018, supported by distribution centers in Pennsylvania and Georgia.
This Form 10-Q covers the thirteen weeks and thirty-nine weeks ended November 3, 2018, compared with the periods ended October 28, 2017. The request metadata identifies “2017 Q3,” but the filing is for fiscal third quarter 2018. The interim financial statements are unaudited, and the business is seasonal, with generally higher demand in the fourth quarter.
Financial Performance and Position
| Metric | Q3 2018 | Q3 2017 | YTD 2018 | YTD 2017 |
|---|---|---|---|---|
| Net sales | $283.6 million | $238.1 million | $847.4 million | $720.4 million |
| Gross profit | $115.4 million | $98.0 million | $340.9 million | $291.2 million |
| Gross margin | 40.7% | 41.2% | 40.2% | 40.4% |
| Operating income | $29.3 million | $24.2 million | $100.1 million | $81.4 million |
| Net income | $24.8 million | $18.9 million | $85.1 million | $57.5 million |
| Diluted EPS | $0.38 | $0.29 | $1.29 | $0.89 |
| Adjusted EBITDA | $34.7 million | $29.2 million | $116.0 million | $96.2 million |
Q3 sales increased 19.1%, while year-to-date sales increased 17.6%. Comparable-store sales rose 4.6% in Q3 and 3.6% year to date. Operating margin was 10.3% in Q3 and 11.8% year to date, versus 10.2% and 11.3%, respectively, in the comparable periods. Net profit margin was 8.8% in Q3 and 10.0% year to date, versus 7.9% and 8.0%.
SG&A increased in dollars but declined as a percentage of sales to 27.7% from 28.6% in Q3 and to 26.4% from 27.2% year to date. Gross margin declined because of higher supply-chain costs as a percentage of sales, partly offset by improved merchandise margin.
Net cash provided by operating activities was $46.9 million year to date, compared with $20.4 million in the prior-year period. Capital expenditures were $62.7 million, including approximately $42.0 million for 12 former Toys “R” Us locations. Cash used in financing activities was $22.8 million, including $25.0 million of voluntary term-loan prepayments. Cash declined by $38.5 million to $0.7 million at November 3, 2018.
Total debt was $19.2 million, consisting primarily of $18.7 million under the term loan facility and $0.5 million of capital leases. There were no revolving-credit borrowings; availability was $89.9 million, subject to $9.8 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
- Q3 net sales increased $45.5 million, driven by $10.3 million of comparable-store sales growth and $35.2 million from non-comparable stores.
- Year-to-date net sales increased $127.1 million, including $24.9 million of comparable-store sales growth and $102.2 million from non-comparable stores.
- The company opened 17 stores and closed two in Q3; year to date it opened 31 stores, including one relocation, and closed two. Store count increased from 265 to 297 year over year.
- Net income increased 31.6% in Q3 and 47.9% year to date, aided by sales growth, operating leverage, lower interest expense and lower effective tax rates.
- Interest expense declined 67.5% in Q3 and 67.0% year to date following term-loan repayments.
- Effective tax rates were 14.2% in Q3 and 13.9% year to date, compared with 18.2% and 25.6%, partly reflecting the Tax Cuts and Jobs Act and excess tax benefits from stock-based compensation.
- The company adopted the new revenue-recognition standard using the modified retrospective method, reducing opening retained earnings by $5.6 million. The adoption created an $8.9 million loyalty-program deferred-revenue liability at November 3, 2018 but did not materially affect the income statement or cash flows.
Guidance, Outlook, Risks and Unusual Items
Management expected to open 37 stores in fiscal 2018, including one relocation, and expected capital expenditures to be funded primarily through operating cash flow. Management stated that cash, operating cash flow and revolving-credit availability were expected to fund planned capital expenditures, working capital and debt service over the following 12 months.
The company commenced 38 new store leases year to date, with approximately $55.9 million of future minimum lease payments. On November 29, 2018, it acquired land in Lancaster, Texas for a planned 615,000-square-foot third distribution center, expected to be operational in the first quarter of fiscal 2020. Total project investment is expected to be $45 million to $50 million.
Key risks include inventory procurement and valuation, consumer spending, competition, store-opening execution, lease availability, distribution-center disruptions, seasonal working-capital needs, variable interest rates, covenant compliance, international sourcing, information systems and the absence of a significant online retail operation. Management identified no material litigation exposure and no significant changes to previously disclosed risk factors.
The company expects the new lease accounting standard to materially increase reported assets and liabilities when adopted, although it does not anticipate a material income-statement impact. A 1% change in interest rates would affect annual interest expense by approximately $0.2 million based on the term-loan balance at period end.
Important Facts for Investors to Verify
- Confirm that the intended period is fiscal Q3 2018, not Q3 2017, because the filing period ended November 3, 2018.
- Assess whether comparable-store sales growth and new-store productivity can offset the modest gross-margin pressure from higher supply-chain costs.
- Review cash availability and seasonal inventory requirements: period-end cash was only $0.7 million, with $332.3 million of inventory.
- Evaluate the returns and execution risks associated with the 12 acquired former Toys “R” Us locations and the planned Texas distribution center.
- Adjust analysis for tax benefits, stock-based compensation and the $5.6 million revenue-standard adoption adjustment.
- Monitor covenant compliance, variable-rate debt exposure and the maturity of the credit facilities in January 2021.