Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and year-to-date period ended October 29, 2016, compared with October 31, 2015. The supplied metadata labels this “2015 Q3,” but the filing is the fiscal 2016 third-quarter Form 10-Q. The quarter covered 13 weeks and the year-to-date period covered 39 weeks. Financial statements are unaudited.
Business context
Ollie’s operates a single-segment chain of extreme-value retail stores selling branded, closeout, overstocked, and private-label merchandise. It operated 232 stores in 19 states at October 29, 2016, supported by two distribution centers. The company opened 16 stores during the quarter and 29 stores year to date.
Financial performance and metrics
| Metric | Q3 2016 | Q3 2015 | 39 weeks 2016 | 39 weeks 2015 |
|---|---|---|---|---|
| Net sales | $202.0 million | $174.6 million | $607.0 million | $519.0 million |
| Net sales growth | 15.7% | — | 17.0% | — |
| Comparable-store sales growth | 1.8% | 3.2% | 3.7% | 6.5% |
| Gross profit | $84.2 million | $69.9 million | $247.0 million | $204.0 million |
| Gross margin | 41.7% | 40.1% | 40.7% | 39.3% |
| Operating income | $18.6 million | $13.9 million | $61.6 million | $46.3 million |
| Operating margin | 9.2% | 8.0% | 10.2% | 8.9% |
| Net income | $10.5 million | $6.8 million | $35.3 million | $19.8 million |
| Diluted EPS | $0.17 | $0.11 | $0.57 | $0.37 |
| Adjusted EBITDA | $23.6 million | $17.6 million | $76.0 million | $56.9 million |
Quarterly net income increased 54.7%, while year-to-date net income increased 78.7%. Adjusted EBITDA increased 34.0% in the quarter and 33.5% year to date. Gross-margin expansion was attributed primarily to lower fuel costs, lower import container rates, and modestly higher merchandise margins.
Cash flow, liquidity, debt, and balance sheet
- Cash and cash equivalents were $36.0 million at October 29, 2016, compared with $4.0 million at October 31, 2015 and $30.3 million at January 30, 2016.
- Year-to-date operating cash flow was $4.2 million, compared with cash used in operations of $15.4 million in the prior-year period.
- Year-to-date capital expenditures were $14.2 million, compared with $10.9 million in the prior-year period.
- Year-to-date financing cash flow was $15.8 million. The company received $11.7 million from stock-option exercises and made $3.8 million of term-loan and capital-lease repayments.
- Total debt was $195.2 million, consisting principally of $196.3 million of New Term Loan borrowings, net of issuance costs and discounts, and $0.3 million of capital leases. The company had no revolving-credit borrowings.
- Revolving-credit availability was $98.3 million, subject to borrowing-base limitations, with $1.5 million of letters-of-credit commitments and $0.2 million of rent reserves.
- Inventory was $240.8 million, up from $212.6 million at October 31, 2015, reflecting seasonal preparation for holiday sales and store growth.
- The company was in compliance with its credit-facility covenants. The term loan carried an interest rate of approximately 2.28% at October 29, 2016; a 1% change in the rate would affect annual interest expense by approximately $2.0 million based on the outstanding balance.
Material changes versus the prior comparable period
- Sales growth was driven primarily by new stores: 16 openings in the quarter versus 13, and 29 openings year to date versus 25 openings in the prior-year period, while comparable-store sales growth moderated.
- Store count increased to 232 from 200 at the end of the prior-year comparable period.
- Gross margin improved 160 basis points in the quarter and 140 basis points year to date.
- SG&A increased 16.8% in the quarter and 17.5% year to date, primarily due to store growth, higher sales volume, infrastructure investment, and public-company costs. Excluding transaction-related expenses, year-to-date SG&A as a percentage of sales declined to 28.2% from 28.3%.
- Net interest expense declined 57.3% in the quarter and 63.0% year to date following debt reduction and the January 2016 refinancing.
- The prior-year year-to-date results included a $2.4 million loss on extinguishment of debt; no such charge was recorded in 2016.
- Effective tax rates increased to 39.3% for the quarter and 38.1% year to date, versus 36.5% and 37.5%, respectively, partly because the prior-year periods benefited from a discrete employment-tax-credit adjustment.
- Three secondary offerings were completed in 2016 by selling stockholders. The company received no offering proceeds, except for $7.5 million from stock-option exercises, and recorded approximately $1.7 million of related expenses year to date.
Guidance, outlook, risks, and unusual items
Management expects store growth to remain the primary driver of sales and profitability and believes existing cash, operating cash flow, and revolving-credit availability will fund planned capital expenditures, working capital, and debt service for the next 12 months and foreseeable future. The filing does not provide a specific quarterly or annual revenue, earnings, or store-opening guidance figure.
- Management expects to continue investing in new stores, distribution centers, store resets, information technology, and corporate infrastructure. Two additional stores were opened after October 29, 2016.
- The business is seasonal, with peak demand in the fourth quarter. Inventory, accounts payable, and accrued expenses typically rise in the third and fourth quarters before holiday sales.
- Thirty-one new store leases commenced year to date, with approximately $34.9 million of minimum lease payments over their initial terms.
- Key risks include inventory management and demand forecasting, consumer spending, competition, successful new-store openings, personnel retention, lease availability, distribution-center disruptions, seasonality, international sourcing, online-retail exposure, debt service, covenant compliance, and variable interest rates.
- The company expects to lose emerging-growth-company status beginning January 28, 2017, resulting in additional reporting and internal-control requirements.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting during the quarter. Legal matters arising in the ordinary course were not expected to have a material adverse effect.
- Recently issued accounting standards for revenue recognition, leases, and stock compensation were still under evaluation; debt-issuance-cost presentation and deferred-tax classification changes had been adopted.
Important facts for investors to verify
- Reconcile reported sales growth with the contribution from 32 additional stores and the slower comparable-store sales trends.
- Assess whether gross-margin benefits from lower freight and fuel costs are sustainable.
- Monitor seasonal inventory growth, holiday sell-through, working-capital needs, and fourth-quarter cash generation.
- Review the $195.2 million debt balance, variable-rate exposure, covenant requirements, maturity in 2021, and available revolver capacity.
- Evaluate the cash-return profile after $14.2 million of year-to-date capital expenditures and planned store and distribution-center investments.
- Consider the effect of higher effective tax rates, public-company costs, transaction expenses, and the transition out of emerging-growth-company status.
- Review operating-lease commitments and the company’s ability to open profitable stores while maintaining comparable-store performance.