Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen and twenty-six weeks ended August 1, 2015, compared with August 2, 2014. Although the request metadata identifies “2014 Q2,” the filing is a fiscal 2015 second-quarter report. The company operated 187 stores in 16 states at quarter-end, versus 167 stores a year earlier.
Business Context and Reporting Period
Ollie’s is an extreme-value retailer selling branded, overstocked, overproduced, closeout and private-label merchandise. The company operates one reportable segment and relies primarily on store expansion, opportunistic buying and customer loyalty through Ollie’s Army. It opened seven stores and closed one during the quarter; year to date, it opened 12 stores and closed one.
Key Financial Metrics
| Metric | 13 Weeks Ended August 1, 2015 | 13 Weeks Ended August 2, 2014 | 26 Weeks Ended August 1, 2015 | 26 Weeks Ended August 2, 2014 |
|---|---|---|---|---|
| Net sales | $181.9 million | $152.9 million | $344.4 million | $287.3 million |
| Gross profit | $70.1 million | $59.2 million | $134.1 million | $114.6 million |
| Gross margin | 38.5% | 38.7% | 38.9% | 39.9% |
| Operating income | $16.8 million | $14.0 million | $32.3 million | $26.0 million |
| Net income | $6.4 million | $5.7 million | $13.0 million | $10.1 million |
| Diluted EPS | $0.12 | $0.12 | $0.26 | $0.21 |
| Adjusted EBITDA | $22.5 million | $18.4 million | $42.2 million | $35.5 million |
| Net cash used in operating activities | Not separately provided | Not separately provided | $(17.2) million | $(19.4) million |
Quarterly net sales increased 19.0%, operating income increased 20.2%, net income increased 10.9% and Adjusted EBITDA increased 22.0%. Year-to-date net sales increased 19.9%, operating income increased 24.2%, net income increased 29.4% and Adjusted EBITDA increased 18.9%.
Comparable-store sales increased 7.8% in the quarter and 8.3% year to date, compared with 3.8% and 0.5%, respectively, in the prior-year periods. Store-level Adjusted EBITDA margin for comparable stores was 15.6% in the quarter versus 14.8% in the prior year; the year-to-date margin was 15.2% in both periods.
At August 1, 2015, cash was $0.8 million, inventories were $187.2 million and total assets were $918.4 million. Total debt was approximately $227.8 million, consisting of $213.2 million of term and capital-lease debt plus $9.6 million drawn on the revolving facility and $3.4 million of current debt maturities. The company reported $111.2 million of revolver availability, subject to borrowing-base limitations, with $3.9 million of letters of credit and $0.2 million of rent reserves.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected a 7.8% quarterly and 8.3% year-to-date comparable-store increase, additional stores and favorable weather, with strength in lawn and garden, food, electronics, bed and bath, hardware and seasonal categories.
- Gross margin declined 20 basis points in the quarter and 95 basis points year to date, primarily because of higher distribution and transportation costs, partly offset by improved merchandise margins.
- SG&A leverage improved: SG&A declined to 27.2% of sales from 27.5% in the quarter and to 27.7% from 28.5% year to date. Absolute SG&A increased because of store growth, public-company costs and IPO-related expenses.
- The July 2015 IPO issued 10,263,750 shares at $16.00 per share and generated approximately $153.1 million of net proceeds. Proceeds were used to repay $50.0 million of revolver borrowings and approximately $103.1 million of term-loan principal.
- The IPO-related debt repayment generated a $2.4 million loss on extinguishment of debt in the quarter and year to date, reflecting the write-off of debt issuance costs and original issue discount.
- On May 27, 2015, the company increased revolver capacity from $75.0 million to $125.0 million and borrowed $50.0 million to fund a $48.8 million cash dividend.
- Cash flow remained seasonal and negative year to date: operating cash use was $17.2 million, investing cash use was $6.0 million and financing activities provided $2.0 million. Cash declined from $22.0 million at the beginning of the year to $0.8 million at quarter-end.
Guidance, Outlook, Risks and Unusual Items
- Management expected to open 25 to 30 stores and close one store during fiscal 2015. At quarter-end, 12 stores had opened, with 13 to 18 additional openings planned for the remainder of the year.
- Fiscal 2015 capital expenditures were expected to be approximately $13.0 million to $14.5 million; $6.0 million had been spent year to date.
- Management stated that cash, operating cash flows and revolver availability were expected to fund planned capital expenditures, working capital and debt service over the next 12 months and thereafter. However, year-to-date operating cash flow was negative and working capital is expected to rise ahead of the holiday season.
- The business is highly seasonal, with peak sales in the fourth quarter and inventory, payables and accrued expenses generally highest in the third and fourth quarters.
- Material risks include inventory sourcing and markdown risk, consumer spending and competition, execution of new-store growth, lease obligations, distribution-center disruptions, variable interest rates, debt covenants, labor and regulatory costs, cybersecurity and the absence of an online retail platform.
- A 1.0% change in the interest rate on the term loan would affect annual interest expense by approximately $2.1 million based on the August 1, 2015 balance. The company was in compliance with its debt covenants.
- Fifteen new store leases commenced during the first half, with future minimum lease payments of approximately $15.2 million. The company stated that current litigation was not expected to have a material adverse effect.
- The company does not expect to pay cash dividends for the foreseeable future. It is an emerging growth company and a controlled company under Nasdaq rules, with CCMP holding approximately 59.2% and the CEO approximately 24.0% of outstanding common stock.
Important Facts for Investors to Verify
- Confirm that comparable-store sales momentum and planned store openings continue without excessive cannibalization or margin pressure.
- Monitor gross-margin recovery, particularly distribution, transportation, shrink and markdown costs.
- Assess liquidity through the holiday inventory build, given low cash, negative year-to-date operating cash flow and variable-rate debt.
- Review the debt agreements for maturity schedules, borrowing-base availability, covenant requirements and dividend restrictions.
- Evaluate the sustainability of Adjusted EBITDA after excluding pre-opening, stock-based compensation, IPO and debt-related items.
- Track the effect of public-company costs, stock-option dilution and the January 2016 expiration of significant share lock-up restrictions.