Business Context and Reporting Period
Ollie’s Bargain Outlet Holdings, Inc. is a single-segment extreme-value retailer of brand-name, closeout, private-label and opportunistically sourced merchandise. The company operated 268 stores in 20 Eastern U.S. states as of February 3, 2018, supported by distribution centers in York, Pennsylvania and Commerce, Georgia.
The supplied filing is a Form 10-K for the 53-week fiscal year ended February 3, 2018, with comparisons to the 52-week fiscal years ended January 28, 2017 and January 30, 2016. This does not correspond to the requested “2016 Q4” period; the filing provides annual 2017 results and unaudited quarterly data, including fourth-quarter 2017.
Financial and Operating Metrics
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $1.077 billion | $890.3 million | +21.0% |
| Gross profit | $431.6 million | $360.4 million | +19.8% |
| Gross margin | 40.1% | 40.5% | Down 40 basis points |
| Operating income | $135.8 million | $102.2 million | +32.9% |
| Operating margin | 12.6% | 11.5% | Up 110 basis points |
| Net income | $127.6 million | $59.8 million | +113.5% |
| Diluted EPS | $1.96 | $0.96 | +104.2% |
| Adjusted EBITDA | $155.4 million | $121.1 million | +28.2% |
| Adjusted EBITDA margin | 14.4% | 13.6% | Up 80 basis points |
Comparable-store sales increased 3.3%, while the store base grew 14.5% from 234 to 268 locations. Average net sales per store increased to approximately $4.25 million from $4.05 million. The additional fiscal week contributed approximately $16.5 million of sales; excluding it, sales increased 19.1%.
- Cash flow: Operating cash flow was $95.9 million, compared with $67.1 million in fiscal 2016. Investing cash flow was negative $19.2 million, primarily due to $19.3 million of capital expenditures.
- Liquidity: Cash and cash equivalents were $39.2 million at year-end, compared with $98.7 million a year earlier. The decrease primarily reflected $146.3 million of voluntary term-loan prepayments.
- Debt: Total debt was $49.0 million, including $48.8 million of term-loan borrowings and no revolver borrowings. The company reported $96.0 million of revolver availability, $3.7 million of letters of credit and $0.3 million of rent reserves.
- Balance sheet: Inventories were $255.2 million, total assets were $1.038 billion, total liabilities were $241.7 million and stockholders’ equity was $796.5 million.
- Tax: Income tax expense fell to $2.9 million from $36.5 million, producing a 2.2% effective tax rate versus 37.9%. The decline included a material benefit from the Tax Cuts and Jobs Act and a benefit related to stock-based compensation accounting.
- Seasonality: The fourth quarter is the strongest sales period because of holiday demand. Fourth-quarter 2017 sales were $356.7 million and net income was $70.1 million, including a $30.9 million tax benefit related to federal tax reform.
Material Changes Versus the Prior Comparable Period
- Sales growth was driven primarily by 34 new stores and, to a lesser extent, 3.3% comparable-store sales growth. Customer transactions and average transaction size both increased.
- Gross margin declined modestly because of lower merchandise margins, partly offset by favorable supply-chain costs.
- SG&A increased 14.5% in dollars but declined to 25.8% of sales from 27.3%, reflecting operating leverage. Fiscal 2016 included $1.7 million of secondary-offering transaction expenses.
- Interest expense declined 24.7% because of the substantial term-loan prepayments and lower average debt balances.
- Net income growth was amplified by the unusually low 2017 effective tax rate; the tax benefit is not indicative of recurring operating performance.
- Ollie’s Army membership increased 19.4% to 8.8 million members. Members generated approximately 70% of sales and spent approximately 40% more per trip than non-members.
Guidance, Outlook, Risks and Unusual Items
Management expects store openings to remain the primary driver of sales and profitability growth. For fiscal 2018, the company expected to open 36 to 38 stores and enter Arkansas and Louisiana. Management estimated potential for more than 950 U.S. locations and stated that its existing distribution infrastructure could support approximately 350 to 400 stores over the next several years.
The company expects cash on hand, operating cash flow and revolver availability to fund planned capital expenditures, working capital and debt service for the next 12 months. Capital expenditures are expected to support new stores, store resets, distribution centers and information technology.
- Key operating risks include inventory procurement and markdown risk, changing consumer demand, intense retail and online competition, labor availability and wage costs, lease terms, and execution of new-store expansion.
- The business depends on two centralized distribution centers and is exposed to transportation disruptions, weather, natural disasters and other operational interruptions.
- The company does not currently operate an online retail marketplace, creating potential competitive risk as online shopping expands.
- Approximately 16% of 2017 merchandise purchases were direct imports, exposing the company to tariffs, trade restrictions, shipping costs, foreign exchange and geopolitical risks.
- Inventory represented 70.7% of total assets excluding goodwill, trade name and other intangible assets, increasing the importance of inventory valuation, shrinkage and markdown estimates.
- Variable-rate debt creates interest-rate exposure; management estimated that a 1% rate change would affect annual interest cost by approximately $0.5 million based on year-end term debt.
- The company had $273.7 million of future minimum operating-lease payments, including reasonably assured renewal periods.
- The company reported compliance with its credit-facility covenants, including a fixed-charge coverage ratio requirement of at least 1.1 to 1.0 and a total leverage ratio limit of 3.5 to 1.0. No material pending legal proceedings were disclosed.
- The company does not expect to pay cash dividends in the foreseeable future, and credit-facility restrictions limit dividends and other distributions.
Important Facts for Investors to Verify
- Confirm the intended period: the supplied filing is fiscal 2017, not fiscal 2016 fourth quarter.
- Separate the recurring operating performance from the $30.9 million tax benefit and the resulting 2.2% effective tax rate.
- Evaluate whether comparable-store sales can remain positive as the store base expands and new stores potentially cannibalize existing locations.
- Review gross-margin trends, inventory levels, markdowns and shrinkage, particularly given the company’s opportunistic buying model.
- Verify the pace, cost and returns of the planned 36 to 38 fiscal 2018 store openings and the capacity of the distribution network.
- Monitor variable-rate debt, scheduled principal payments, covenant compliance and available revolver capacity.
- Assess the effect of lease commitments, labor costs, freight costs, tariffs and the absence of an online sales channel on future margins and liquidity.
- Review the adoption of the new revenue-recognition standard on February 4, 2018, including the $5.6 million reduction to opening retained earnings and changes related to loyalty programs, gift-card breakage and sales returns.