Ollie’s Bargain Outlet Holdings, Inc. — Form 10-K Summary
Reporting period: The supplied filing is the fiscal 2019 Form 10-K for the 52-week year ended February 1, 2020, with comparison to fiscal 2018 ended February 2, 2019. The metadata reference to “2018 Q4” does not match the filing period. Fiscal 2019 fourth-quarter results are also disclosed.
Business context
Ollie’s operates a single reporting segment comprising extreme-value retail stores selling closeout, overstock, private-label and other discounted merchandise. It operated 345 stores in 25 states at year-end, compared with 303 stores a year earlier. Ollie’s Army loyalty membership reached 10.2 million, and members generated approximately 70% of 2019 sales.
Key financial metrics
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $1,408.2 million | $1,241.4 million | +13.4% |
| Gross profit | $555.6 million | $497.7 million | +11.6% |
| Gross margin | 39.5% | 40.1% | Down 60 bps |
| Operating income | $171.9 million | $162.1 million | +6.0% |
| Operating margin | 12.2% | 13.1% | Down 90 bps |
| Net income | $141.1 million | $135.0 million | +4.5% |
| Diluted EPS | $2.14 | $2.05 | +4.4% |
| Adjusted EBITDA | $196.0 million | $183.7 million | +6.7% |
| Cash flow from operations | $105.3 million | $126.1 million | Down $20.7 million |
| Capital expenditures | $77.0 million | $74.2 million | +3.8% |
Comparable-store sales declined 2.1%, versus growth of 4.2% in fiscal 2018. Sales growth was driven by $190.9 million of non-comparable-store sales from new stores, partly offset by a $24.1 million comparable-store sales decline. Average net sales per store decreased to $4.234 million from $4.330 million.
Fiscal fourth-quarter sales were $422.4 million, gross profit was $165.5 million and net income was $50.3 million, compared with $393.9 million, $156.7 million and $49.9 million, respectively, in the prior-year fourth quarter.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $90.0 million at February 1, 2020, versus $51.9 million at February 2, 2019.
- Total debt was $0.8 million, consisting primarily of finance leases. The prior term loan had been fully repaid in fiscal 2018.
- The $100 million revolving credit facility, maturing May 22, 2024, had no borrowings, $90.8 million of availability, $9.0 million of outstanding letters of credit and $0.2 million of rent reserves.
- The company was in compliance with its credit-facility covenants, including a fixed-charge coverage ratio requirement applicable during covenant periods.
- Operating lease liabilities totaled $353.3 million, including $53.6 million current and $299.7 million long-term, following adoption of the lease accounting standard.
- Inventory increased to $335.2 million from $296.4 million. Inventory represented 59.0% of total assets excluding operating lease right-of-use assets, goodwill and trade name.
- Operating cash flow declined primarily because of increased working-capital requirements associated with new stores and inventory.
Material changes versus the prior comparable period
- The store base increased by 42 net stores, while no stores were closed in fiscal 2019; 37 stores were opened and two were closed in fiscal 2018.
- Gross margin contracted because of higher supply-chain costs as a percentage of sales; merchandise margin was described as consistent.
- SG&A increased 13.8% and rose to 25.3% of sales from 25.2%, primarily due to store payroll, occupancy and other costs related to new stores. Fiscal 2019 included a $1.0 million insurance-settlement gain.
- Net interest income of $0.9 million replaced $1.3 million of net interest expense after repayment of the prior term loan and increased interest income on cash.
- The company repurchased 689,457 shares for $40.0 million under a $100.0 million authorization, leaving $60.0 million available at year-end.
- A new 615,060-square-foot distribution center in Lancaster, Texas became operational in February 2020. Fiscal 2019 investment in its construction was $42.8 million.
- The company adopted the lease standard at the beginning of fiscal 2019, recognizing $268.2 million of right-of-use assets and $269.1 million of operating lease liabilities at adoption. The adoption materially affected the balance sheet but not income or cash flow.
- The company corrected a prior-period cash-flow presentation error involving activity in a cash account incorrectly classified as revolving-credit borrowings and repayments; there was no effect on net financing cash flow, income or the balance sheet.
Outlook, commentary and risks
- Management expected to open 47 to 49 stores in fiscal 2020 and believed the Lancaster distribution center could support approximately 500 to 600 stores over the next several years once fully operational.
- Management stated that new-store openings would remain the primary driver of sales and profitability growth, supported by sourcing expansion, product assortment improvements and increased use of Ollie’s Army data-driven marketing.
- In March 2020, COVID-19 was identified as a pandemic. At the filing date, stores had not been required to close, but were operating with reduced hours and the company had experienced increased sales pressure. The filing states that the ultimate operational and financial impact was uncertain.
- Principal risks include weaker consumer spending, declining comparable-store sales, inventory procurement and markdown risk, intense retail and online competition, tariffs and international sourcing disruptions, distribution-center interruptions, labor and occupancy-cost inflation, cybersecurity, litigation, product liability and covenant compliance.
- The founder, Chairman and CEO Mark Butler died unexpectedly in December 2019. John Swygert was appointed President and CEO. The estate of Mr. Butler beneficially owned approximately 13.3% of outstanding shares at February 1, 2020.
- A purported shareholder class action alleges materially false or misleading statements regarding earnings, projections, supply chain and inventory. Management stated that it believes the case is without merit, but the outcome cannot be predicted.
- No cash dividends were declared or expected for the foreseeable future. Credit-facility terms restrict dividends and certain other distributions.
Investor verification checklist
- Verify the applicable period: fiscal 2019 ended February 1, 2020, rather than “2018 Q4.”
- Assess whether the 2.1% comparable-store sales decline and lower average sales per store indicate ongoing traffic or merchandising weakness.
- Review inventory aging, markdown assumptions and shrinkage, particularly given inventory of $335.2 million and the auditor’s critical audit matter concerning excess inventories.
- Evaluate the effect of COVID-19 on store hours, sales, supply chains, inventory levels, liquidity and fiscal 2020 store-opening plans.
- Reconcile operating cash flow with net income and monitor working-capital needs as store growth continues.
- Review the $353.3 million recognized operating lease liability and total contractual lease payments of $413.5 million before imputed interest.
- Confirm borrowing-base availability, letters of credit, covenant compliance and the May 2024 revolving-facility maturity.
- Monitor management succession following Mr. Butler’s death and the planned May 2020 retirement of the Senior Vice President of Store Operations.
- Follow developments in the shareholder litigation and any potential impact on financial condition, reputation or disclosures.