Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Business context and reporting period
This filing covers the thirteen weeks ended April 30, 2022, the first quarter of fiscal 2022, compared with the thirteen weeks ended May 1, 2021. The request metadata identifies “2021 Q1,” but the filing itself is for fiscal 2022 Q1. Ollie’s operates as an extreme-value retailer of closeout, overstocked, overproduced and private-label merchandise. It operated 439 stores in 29 states at quarter-end, supported by three distribution centers.
Financial performance and condition
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $406.7 million | $452.5 million | Down 10.1% |
| Gross profit | $141.3 million | $182.6 million | Down 22.6% |
| Gross margin | 34.8% | 40.4% | Down 560 basis points |
| Operating income | $17.1 million | $71.2 million | Down 75.9% |
| Operating margin | 4.2% | 15.7% | Down 1,150 basis points |
| Net income | $12.5 million | $55.2 million | Down 77.3% |
| Diluted EPS | $0.20 | $0.84 | Down $0.64 |
| Adjusted EBITDA | $26.2 million | $79.2 million | Down 66.9% |
Comparable-store sales decreased 17.3%, versus an 18.8% increase in the prior-year quarter. The decline reflected fewer transactions, partly offset by higher average transaction size. Non-comparable sales increased by $29.9 million, primarily from new-store growth and strong performance at new locations.
SG&A increased 11.4% to $116.3 million and rose to 28.6% of sales from 23.1%, driven by the larger store base, higher wage rates and deleveraging from lower sales. Cost of sales increased to 65.2% of sales from 59.6%; management attributed the gross-margin pressure primarily to higher import, labor and other supply-chain costs, partially offset by improved merchandise margin. The effective tax rate increased to 26.5% from 22.5%.
Operating cash flow was negative $31.5 million, compared with positive $40.1 million in the prior-year period, principally because of increased working-capital requirements and lower sales. Inventory increased to $517.0 million from $355.2 million a year earlier. Capital expenditures were $9.7 million, compared with $9.5 million, and investing cash use was $9.6 million.
Cash and cash equivalents were $205.5 million at April 30, 2022, down from $247.0 million at January 29, 2022 and $472.2 million at May 1, 2021. The company had no borrowings under its $100.0 million revolving credit facility, $90.9 million of borrowing availability, $8.9 million of outstanding letters of credit and $0.2 million of rent reserves. Debt consisted primarily of finance leases, with current and long-term debt totaling approximately $1.1 million. Operating lease liabilities totaled $440.5 million, including $362.1 million long term.
Material changes versus the prior comparable period
- Sales performance reversed from prior-year stimulus-supported growth to a 10.1% decline; comparable-store sales fell 17.3%.
- Gross margin contracted 560 basis points because of higher supply-chain, import and labor costs.
- SG&A rose despite lower sales, causing significant expense deleveraging.
- Net income and Adjusted EBITDA declined 77.3% and 66.9%, respectively.
- Operating cash flow shifted from a $40.1 million inflow to a $31.5 million outflow, largely due to inventory investment and weaker earnings.
- The company opened nine stores and closed one store in a relocation, compared with 11 openings and two relocated closures in the prior-year quarter.
- No shares were repurchased during the quarter, compared with $9.6 million of repurchases in Q1 FY2021. In May 2022, the company repurchased 238,485 shares for $10.0 million, leaving $170.0 million under the authorization.
Guidance, outlook, commentary and risks
Management expected to open approximately 46 to 48 stores during fiscal 2022, including two relocations. It also planned a 200,000-square-foot expansion of the York, Pennsylvania distribution center, expected to add capacity for approximately 50 stores upon completion. Management stated that distribution capabilities could support approximately 500 to 600 stores over the next several years.
The company believed cash on hand, operating cash flow and revolving-credit availability would be adequate for planned capital expenditures, working capital, debt service and other financing needs over the next 12 months. It cautioned that additional equity or debt financing could be required if those sources prove insufficient or unavailable.
COVID-19-related labor pressures, supply-chain disruptions, higher import and trucking costs, and possible changes in consumer spending remained significant uncertainties. Other key risks include inventory procurement and demand forecasting, inflation and discretionary-income changes, competition, store-opening execution, lease availability, distribution-center disruptions, cybersecurity, reliance on brick-and-mortar retail, lack of online operations, litigation, seasonality, natural disasters and compliance with credit-facility covenants. The company reported compliance with its credit facility and no material changes to previously disclosed risk factors.
Operating leases expire at various dates through 2035. Undiscounted lease payments totaled $490.9 million, excluding $58.1 million of minimum payments for signed but not yet commenced leases. The company stated that current litigation is not expected to have a material adverse effect, although outcomes cannot be predicted.
Most important facts for investors to verify
- Whether comparable-store sales and transaction counts recover after the stimulus-related prior-year comparison.
- Whether gross margin stabilizes as import, freight, labor and other supply-chain costs evolve.
- Inventory levels, sell-through, markdowns and operating cash flow, particularly ahead of the seasonal holiday buildup.
- Execution of the planned 46–48 store openings and York distribution-center expansion, including construction and permitting delays.
- Cash utilization, revolving-credit availability and compliance with the fixed-charge coverage covenant.
- The financial effect and timing of additional share repurchases, including the $10.0 million repurchase completed in May 2022.
- The effect of operating lease commitments and other fixed costs on liquidity during periods of lower sales.