Ollie’s Bargain Outlet Holdings, Inc. — Form 10-K Summary
Reporting period: The source is the Form 10-K for the 52-week fiscal year ended January 30, 2021, referred to as fiscal 2020. The request metadata identifies “2019 Q4,” but the filing principally reports fiscal 2020 versus fiscal 2019. Fiscal fourth-quarter data are included below where relevant.
Business context
Ollie’s operates one reporting segment as an extreme-value, brick-and-mortar retailer of branded, closeout, private-label and other merchandise. It operated 388 stores in 25 states at year-end, compared with 345 stores a year earlier. The company opened 46 stores, closed four and reopened one during fiscal 2020. Management estimates potential for more than 1,050 U.S. locations and believes its distribution network can support approximately 500 to 600 stores over the next several years.
COVID-19 materially influenced fiscal 2020 results. Stores and distribution centers generally remained open as an essential business, while federal stimulus, shifts in consumer spending toward retail and demand for home-related products, cleaning products and personal protective equipment supported sales.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $1.809 billion | $1.408 billion | +28.4% |
| Gross profit | $723.4 million | $555.6 million | +30.2% |
| Gross margin | 40.0% | 39.5% | +50 basis points |
| Operating income | $277.5 million | $171.9 million | +61.5% |
| Operating margin | 15.3% | 12.2% | +310 basis points |
| Net income | $242.7 million | $141.1 million | +72.0% |
| Diluted EPS | $3.68 | $2.14 | +72.0% |
| Adjusted EBITDA | $306.5 million | $196.0 million | +56.4% |
| Net cash from operations | $361.3 million | $105.3 million | +243.0% |
| Capital expenditures | $30.5 million | $77.0 million | -60.4% |
Comparable-store sales increased 15.6% in fiscal 2020 versus a 2.1% decline in fiscal 2019. Management attributed the increase primarily to larger average transactions, stimulus-supported spending and changes in consumer demand. More than 80% of merchandise departments recorded comparable-sales growth.
SG&A increased 17.6% to $418.9 million, but declined to 23.2% of sales from 25.3% because of occupancy and other expense leverage. COVID-related premium pay totaled $9.7 million. The effective tax rate declined to 12.6% from 18.3%, principally because of $34.5 million of excess tax benefits related to stock-based compensation, including stock-option exercises by the estate of former CEO Mark Butler.
Cash and cash equivalents were $447.1 million at January 30, 2021, compared with $90.0 million a year earlier. Inventory was $353.7 million, up from $335.2 million. The company had no borrowings under its revolving credit facility, with $92.0 million of availability, $7.8 million of outstanding letters of credit and $0.2 million of rent reserves. Total finance and long-term debt was not material; reported long-term debt consisted of finance leases.
Total operating lease obligations were $386.2 million on the balance sheet, with $442.4 million of undiscounted future operating lease payments. Contractual obligations also included $23.0 million of guaranteed marketing-service spending through May 2022.
Fiscal fourth-quarter comparison
| Metric | Fiscal Q4 2020 | Fiscal Q4 2019 |
|---|---|---|
| Net sales | $515.8 million | $422.4 million |
| Gross profit | $204.7 million | $165.5 million |
| Net income | $64.7 million | $50.3 million |
| Diluted EPS | $0.98 | $0.77 |
Material changes and unusual items
- Sales growth reflected both a 15.6% comparable-store increase and $194.4 million of non-comparable-store sales from newer locations.
- Gross margin expanded through improved merchandise margin and supply-chain leverage.
- Pre-opening expenses declined to $10.3 million from $13.1 million, partly because grand-opening advertising was reduced to manage COVID-related crowd limits.
- Operating cash flow increased substantially, aided by higher earnings and lower working-capital requirements resulting from payment timing.
- The Lancaster, Texas distribution center became fully operational during the first quarter of fiscal 2020.
- The company repurchased 3,885 shares for approximately $0.3 million in fiscal 2020. The remaining authorization was $159.7 million at year-end; the board authorized an additional $100 million on March 16, 2021.
- The company does not expect to pay cash dividends in the foreseeable future.
- A shareholder securities class action was dismissed with prejudice on February 10, 2021. Management stated that remaining ordinary-course claims were not expected to have a material adverse effect.
Guidance, outlook and management commentary
Management expects new-store openings to remain the primary driver of sales and profitability growth. It expected to open approximately 50 stores, including three or four relocations, during fiscal 2021. The targeted new-store model calls for approximately $1.0 million of initial cash investment and approximately $4.0 million of first-year sales.
The filing does not provide formal fiscal 2021 revenue, earnings or comparable-store-sales guidance. Management cautioned that fiscal 2020 performance may not be indicative of future results because of stimulus-driven spending, temporary store closures or restrictions affecting competitors and pandemic-related shifts in consumer behavior.
Principal risks and contingencies
- COVID-19 could reduce store traffic, restrict operations, disrupt suppliers and increase payroll, healthcare, cleaning and safety costs.
- Results depend on procuring sufficient closeout and branded merchandise at attractive prices; suppliers generally provide no long-term access or pricing assurances.
- Inventory valuation depends on estimates of markdowns, obsolescence, demand and shrinkage. Excess inventory could require material markdowns.
- The brick-and-mortar-only model exposes the company to online competition and changing consumer shopping preferences.
- Expansion depends on favorable real estate, labor availability, distribution capacity and successful execution in new markets.
- Inflation, wage, freight, transportation, occupancy, healthcare and merchandise costs could pressure margins because competitive pricing may limit pass-through.
- The revolving credit facility contains restrictive covenants, including a fixed-charge coverage covenant applicable under specified conditions and limitations on dividends and other restricted payments.
- Cybersecurity, privacy, product liability, recalls, litigation, labor regulation and international sourcing risks could adversely affect results.
- The company is seasonal, with its highest sales and working-capital requirements generally occurring in the fourth quarter.
Investor verification points
- Confirm that the intended period is fiscal 2020 rather than fiscal 2019 fourth quarter; the filing’s annual reporting period ended January 30, 2021.
- Assess how much of the 15.6% comparable-sales increase was temporary and attributable to stimulus, pandemic-related product demand or competitor closures.
- Monitor comparable sales, gross margin, inventory aging and markdowns as pandemic-related conditions normalize.
- Verify the pace, returns and capital requirements of the planned fiscal 2021 store openings and distribution expansion.
- Review operating lease obligations, credit-facility availability and compliance with financial covenants.
- Consider the unusually low 12.6% effective tax rate and the potential normalization of excess stock-compensation tax benefits.
- Review the full risk-factor, legal-proceedings and related-party lease disclosures before relying on the summarized contingencies.