Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Thirteen weeks ended May 5, 2018, compared with thirteen weeks ended April 29, 2017. The provided metadata identifies “2017 Q1,” but the filing is the first quarter of fiscal 2018. Ollie’s operated 276 stores in 21 states at period-end and opened eight stores during the quarter.
Financial Results and Key Metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $275.7 million | $227.6 million | +21.1% |
| Gross profit | $112.9 million | $92.9 million | +21.5% |
| Gross margin | 40.9% | 40.8% | +10 basis points |
| Operating income | $36.0 million | $27.3 million | +31.6% |
| Operating margin | 13.1% | 12.0% | +110 basis points |
| Net income | $30.5 million | $19.0 million | +60.6% |
| Net margin | 11.0% | 8.3% | +270 basis points |
| Diluted EPS | $0.46 | $0.29 | +58.6% |
| Adjusted EBITDA | $41.0 million | $32.1 million | +27.7% |
- Comparable-store sales increased 1.9%, versus 1.7% in the prior-year quarter. Non-comparable sales increased $43.9 million, primarily from newer stores.
- SG&A rose 17.2% to $72.4 million, but declined to 26.2% of sales from 27.1%.
- Interest expense declined 59.7% to $0.5 million due to lower average term-loan balances.
- The effective tax rate was 13.8%, versus 25.9%, benefiting from the Tax Cuts and Jobs Act and excess tax benefits related to stock-based compensation.
Cash Flow, Liquidity, and Debt
- Operating cash flow was $15.3 million, compared with $1.9 million in the prior-year period.
- Capital expenditures were $4.7 million, compared with $3.0 million; investing cash outflow was $4.7 million.
- Financing cash outflow was $22.3 million, including $25.0 million of voluntary term-loan repayments. Cash decreased $11.6 million to $27.6 million.
- Total debt was $24.1 million at May 5, 2018, including $23.7 million under the term loan and $0.4 million of capital leases. The revolving facility had no borrowings.
- Revolving credit availability was $95.3 million, with $4.4 million of letters of credit and $0.3 million of rent reserves. The term loan carried a 3.65% interest rate at period-end.
- The company was in compliance with its credit-facility covenants, including a minimum fixed-charge coverage ratio of 1.1 to 1.0 and maximum total leverage ratio of 3.5 to 1.0.
Material Changes and Unusual Items
- The company adopted ASC 606, Revenue from Contracts with Customers, using the modified retrospective method. The adoption reduced opening retained earnings by $5.6 million, primarily due to loyalty-program and gift-card accounting changes, but did not materially affect first-quarter income or cash flow.
- ASC 606 resulted in an $8.5 million Ollie’s Army loyalty-program liability at May 5, 2018.
- Loss on extinguishment of debt was $0.1 million, compared with $0.4 million, reflecting accelerated debt issuance costs and original issue discount related to term-loan prepayments.
- The company entered into five new store leases with initial terms of approximately seven years and aggregate initial minimum payments of approximately $6.0 million.
- Substantially all stores and distribution centers are subject to operating leases. The company expects adoption of the new lease standard to create significant right-of-use assets and lease liabilities, although the filing does not provide a quantified impact.
Guidance, Outlook, and Risks
- Management expected to open 36 to 38 stores during fiscal 2018 and believed cash, operating cash flow, and revolver availability would fund planned capital expenditures, working capital, and debt service over the following 12 months.
- Management’s strategy emphasizes store growth, expanded bargain merchandise offerings, direct buying relationships, private-label products, and expansion of the Ollie’s Army loyalty program.
- The two distribution centers were described as capable of supporting approximately 350 to 400 stores.
- Key risks include inventory procurement and demand forecasting, consumer spending, competition, store-opening execution, lease availability, distribution-center disruptions, seasonality, information-technology systems, international sourcing, variable interest rates, debt servicing, and compliance with financial covenants.
- The business is seasonal, with generally higher demand in the fourth fiscal quarter and increased inventory and working-capital requirements in the third and fourth quarters.
- Pending ordinary-course litigation was not expected by management to have a material adverse effect, although outcomes cannot be predicted.
Investor Verification Points
- Verify that sales and earnings growth remain supported by sustainable comparable-store performance rather than primarily by new-store openings.
- Monitor gross-margin trends, supply-chain costs, inventory growth, shrinkage, and the effect of seasonal inventory buildup.
- Reconcile reported net income and Adjusted EBITDA, particularly the lower tax rate and stock-based compensation adjustments.
- Confirm continued compliance with debt covenants and assess the effect of variable interest rates and future term-loan repayments.
- Review the quantified balance-sheet impact of the new lease standard when disclosed.
- Assess the future accounting and cash-flow effects of the $8.5 million loyalty-program liability and other ASC 606 changes.