Ollie’s Bargain Outlet Holdings, Inc. — Form 10-Q Summary
Reporting period: The filing covers the thirteen and twenty-six weeks ended July 31, 2021, compared with the corresponding periods ended August 1, 2020. Although the request metadata states “2020 Q2,” the filing is for the second quarter of fiscal 2021. Ollie’s operated 409 stores in 28 states at July 31, 2021.
Financial performance
| Metric | 13 weeks ended July 31, 2021 | 13 weeks ended August 1, 2020 | 26 weeks ended July 31, 2021 | 26 weeks ended August 1, 2020 |
|---|---|---|---|---|
| Net sales | $415.9 million | $529.3 million | $868.4 million | $878.7 million |
| Gross profit | $163.0 million | $206.8 million | $345.6 million | $347.2 million |
| Gross margin | 39.2% | 39.1% | 39.8% | 39.5% |
| Operating income | $45.7 million | $92.0 million | $116.9 million | $135.0 million |
| Operating margin | 11.0% | 17.4% | 13.5% | 15.4% |
| Net income | $34.3 million | $99.4 million | $89.5 million | $132.8 million |
| Diluted EPS | $0.52 | $1.50 | $1.36 | $2.02 |
| Adjusted EBITDA | $54.1 million | $99.4 million | $133.3 million | $149.1 million |
Second-quarter net sales declined 21.4%, driven by a 28.0% comparable-store sales decrease, partially offset by new-store growth. Year-to-date sales declined 1.2%, with comparable-store sales down 9.3%. Gross margin improved modestly, reflecting better merchandise margin, but higher transportation and supply-chain costs partially offset the benefit.
SG&A increased 0.9% in the quarter and 7.9% year to date. SG&A as a percentage of sales increased to 26.5% from 20.6% in the quarter and to 24.7% from 22.6% year to date, reflecting sales deleverage. Pre-opening expense was $2.5 million in the quarter and $5.1 million year to date. The company opened 12 stores in the quarter and 23 stores year to date.
Cash flow, liquidity, debt and capital allocation
- Cash and cash equivalents were $444.3 million at July 31, 2021, compared with $447.1 million at January 30, 2021 and $305.1 million at August 1, 2020.
- Year-to-date cash provided by operating activities was $41.8 million, versus $210.2 million in the prior-year period.
- Capital expenditures were $17.7 million year to date, compared with $18.1 million in the prior-year period.
- Year-to-date financing cash outflow was $30.0 million, primarily reflecting $35.3 million of share repurchases, partially offset by $6.8 million of stock-option exercise proceeds.
- The company had no borrowings under its $100.0 million revolving credit facility and reported $88.6 million of availability, after $11.2 million of letters of credit and $0.2 million of rent reserves.
- Debt consisted primarily of finance leases, with $0.9 million of current and long-term debt outstanding. Operating lease liabilities totaled $402.9 million, including $330.6 million classified as long term.
- The company repurchased 430,178 shares for $35.3 million during the first half of fiscal 2021. Through August 30, 2021, it repurchased an additional 464,857 shares for $36.4 million, leaving $128.3 million under the authorization.
Material changes versus the prior comparable period
- Quarterly net income declined 65.5% and year-to-date net income declined 32.6%.
- Adjusted EBITDA declined 45.6% in the quarter and 10.6% year to date.
- The prior-year results benefited from federal pandemic stimulus spending, store availability while some competitors were closed, and unusually strong demand for personal protective equipment and cleaning supplies.
- Income tax expense increased to $11.3 million in the quarter from a $7.3 million benefit, and to $27.3 million year to date from $2.3 million. The prior-year periods included significant discrete tax benefits related primarily to stock-option exercises by the estate of a former executive.
- Inventory increased to $373.6 million from $327.2 million at the prior-year quarter-end, while accounts payable declined to $92.8 million from $107.7 million.
Guidance, outlook, risks and unusual items
Management expected to open approximately 46 to 47 stores during fiscal 2021; 23 stores had opened through July 31, 2021. The company stated that its distribution capabilities could support approximately 500 to 600 stores over the next several years and that new stores are expected to remain the primary driver of sales growth.
Management believed cash on hand, operating cash flow and revolver availability would be sufficient for planned capital expenditures, working capital, debt service and other financing needs over the next 12 months. The company did not expect to apply for COVID-19 government loan programs.
COVID-19 continued to create labor pressures and supply-chain disruptions. Management noted uncertainty regarding future stimulus measures, consumer demand, potential virus resurgences and variants, transportation costs, store operations and new-store construction or permitting. The company also identified risks related to inventory procurement, competition, brick-and-mortar retail, the absence of a significant online retail presence, leases, distribution centers, litigation, information systems and seasonal working-capital requirements.
Operating leases require undiscounted payments of $454.6 million, excluding $32.0 million of minimum payments for signed but not yet commenced leases. The company also had a $23.0 million guaranteed marketing-services commitment through May 28, 2022. Management reported no material off-balance-sheet arrangements and no significant changes to previously disclosed risk factors.
Investor verification points
- Verify the actual filing period: July 31, 2021, rather than 2020 Q2 stated in the request metadata.
- Assess whether comparable-store sales recover after the 28.0% quarterly and 9.3% year-to-date declines.
- Monitor labor, freight and supply-chain costs, which pressured expense leverage and operating margins.
- Evaluate the sustainability of cash generation given year-to-date operating cash flow of only $41.8 million and planned inventory buildup ahead of the holiday season.
- Review the effect of share repurchases on liquidity, share count and capital allocation.
- Consider the impact of pandemic-related demand normalization, uncertain stimulus support and potential renewed restrictions.
- Review lease commitments, store-opening execution and compliance with the revolving credit facility’s financial and business covenants.