OLLIE'S BARGAIN OUTLET HOLDINGS, INC. The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes ofOllie's Bargain Outlet Holdings, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission , orSEC , onMarch 25, 2020 ("Annual Report"). As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms "Ollie's," the "Company," "we," "our" and "us" refer toOllie's Bargain Outlet Holdings, Inc. and subsidiaries. We operate on a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday nearer toJanuary 31 of the following year. References to "2020" refer to the 52-week period ofFebruary 2, 2020 toJanuary 30, 2021 . References to "2019" refer to the 52-week period ofFebruary 3, 2019 toFebruary 1, 2020 . References to the "second quarter of fiscal 2020" and the "second quarter of fiscal 2019" refer to the thirteen weeks ofMay 3, 2020 toAugust 1, 2020 andMay 5, 2019 toAugust 3, 2019 , respectively. Year-to-date periods endedAugust 1, 2020 andAugust 3, 2019 refer to the twenty-six weeks ofFebruary 2, 2020 toAugust 1, 2020 andFebruary 3, 2019 toAugust 3, 2019 , respectively. Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements can be identified by words such as "could," "may," "might," "will," "likely," "anticipates," "intends," "plans," "seeks," "believes," "estimates," "expects," "continues," "projects" and similar references to future periods, prospects, financial performance and industry outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including, but not limited to, legislation, national trade policy, and the following: our failure to adequately procure and manage our inventory or anticipate consumer demand; changes in consumer confidence and spending; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; the risks associated with doing business with international manufacturers and suppliers including, but not limited to, potential increases in tariffs on imported goods; outbreak of viruses or widespread illness, including the continued impact of COVID-19 and regulatory responses thereto; our inability to operate our stores due to civil unrest and related protests or disturbances; our failure to hire and retain key personnel and other qualified personnel; our inability to obtain favorable lease terms for our properties; the failure to timely acquire, develop and open, the loss of, or disruption or interruption in the operations of, our centralized distribution centers; fluctuations in comparable store sales and results of operations, including on a quarterly basis; risks associated with our lack of operations in the growing online retail marketplace; risks associated with litigation, the expense of defense, and potential for adverse outcomes; our inability to successfully develop or implement our marketing, advertising and promotional efforts; the seasonal nature of our business; risks associated with the timely and effective deployment, protection, and defense of computer networks and other electronic systems, including e-mail; changes in government regulations, procedures and requirements; and our ability to service indebtedness and to comply with our financial covenants together with each of the other factors set forth under "Item 1A - Risk Factors" contained herein and in our filings with theSEC , including our Annual Report. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which such statement is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law. You are advised, however, to consult any further disclosures we make on related subjects in our public announcements andSEC filings. 11
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Overview
Ollie's is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices. Known for our assortment of products offered as "Good Stuff Cheap," we offer customers a broad selection of brand name products, including housewares, food, books and stationery, bed and bath, flooring, toys and hardware. Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns.
Impact of COVID-19
The outbreak of the novel coronavirus COVID-19, which was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 , has led to adverse impacts on theU.S. and global economies. The outbreak of COVID-19 and related measures to quell the outbreak have impacted our supply chain, operations and customer demand. The COVID-19 pandemic could further affect our operations and the operations of our suppliers and vendors as a result of continued restrictions and limitations on travel, shelter-in-place orders, limitations on store or facility operations up to and including closures, and other governmental, business or consumer actions. Our stores and distribution centers have continued to operate as an essential business during the COVID-19 pandemic and we are committed to maintaining a safe work and shopping environment. During the second quarter of fiscal 2020, we effectively responded to changing consumer needs and benefited from increased consumer spending that coincided with economic stimulus provided under the Coronavirus Aid, Relief, and Economic Security (CARES) Act and having our stores open during the quarter while several other retailers were closed for a portion of the period. Our net sales significantly increased as store traffic and customer demand increased. We incurred additional SG&A expenses during the quarter in response to operating during the pandemic as we closely managed other controllable expenses.
Our top priorities in responding to the pandemic have been and continue to be the safety and well-being of our associates and customers. In response to COVID-19, we have taken a number of actions, including the following:
• Implemented procedures for social distancing, cleaning, sanitation, and use of
protective personal equipment in our stores, distribution centers, and store
support center to adhere to the appropriate
• Implemented temporary premium pay for our in-store associates, store
leadership, and distribution center employees.
• Supported our communities by raising money to provide much needed funding to
local food banks through a partnership with
As a result of these efforts, we have incurred and expect to continue to incur higher payroll expenses at our stores and distribution facilities and incremental cleaning and safety costs at all of our facilities.
We continue to actively monitor developments that may cause us to take further actions that alter our business operations as may be required by federal, state or local authorities or that we determine are in the best interests of our associates, customers, suppliers and stockholders. While our results of operations in the second quarter of fiscal 2020 benefited from increased customer demand and traffic, we expect sales to moderate as we progress through the second half of the fiscal year. There remains significant uncertainty related to the economic impact of COVID-19 and the long-term impact of the pandemic is unknown at this time. We expect the impact of the COVID-19 pandemic on our financial condition, results of operations and cash flows will largely depend on the extent and duration of the pandemic, the governmental and public actions taken in response, and the effect the pandemic will have on theU.S. economy. Moreover, the significant uncertainty surrounding the COVID-19 pandemic and its effects may result in impacts or consequences that we do not anticipate at this time or that develop in unexpected ways, which makes it more challenging for management to estimate future performance of our business, including the cadence of new store openings, particularly over the near term. 12
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Our Growth Strategy
Since the founding of Ollie's in 1982, we have grown organically by backfilling
existing markets and leveraging our brand awareness, marketing and
infrastructure to expand into new markets in contiguous states. We have
expanded to 366 stores located in 25 states as of
Our stores are supported by three distribution centers, one each in
We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:
• growing our merchant buying team to increase our access to brand name/closeout
merchandise;
• adding members to our senior management team;
• expanding the capacity of our distribution centers to their current 2.2 million
square feet; and
• investing in information technology, accounting, and warehouse management
systems. Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles. We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:
• growing our store base;
• increasing our offerings of great bargains; and
• leveraging and expanding Ollie's Army, our customer loyalty program.
We have a proven portable, flexible, and highly profitable store model that has produced consistent financial results and returns. Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately$1.0 million , which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses. We target new store sales of approximately$4 million . While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores. The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins. In addition, our new stores generally open strong, immediately contributing to the growth in net sales and profitability of our business. We plan to achieve continued net sales growth, including comparable stores sales, by adding stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers. We also plan to leverage and expand our Ollie's Army database marketing strategies. In addition, we plan to continue to manage our selling, general and administrative expenses ("SG&A") by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs. 13
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Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income. Our customers' discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers. Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods. We also augment our product mix with private label brands. As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.
How We Assess the Performance of Our Business and Key Line Items
We consider a variety of financial and operating measures in assessing the performance of our business. The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.
Number of New Stores
The number of new stores reflects the number of stores opened during a particular reporting period. Before we open new stores, we incur pre-opening expenses described below under "Pre-Opening Expenses" and we make an initial investment in inventory. We also make initial capital investments in fixtures and equipment, which we amortize over time. We expect new store growth to be the primary driver of our sales growth. Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods. Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states. Our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events, but decline shortly thereafter to our new store model levels.
Ollie's recognizes retail sales in its stores when merchandise is sold and the
customer takes possession of the merchandise. Also included in net sales is
revenue allocated to certain redeemed discounts earned via the Ollie's Army
loyalty program and gift card breakage. Net sales are presented net of returns
and sales tax. Net sales consist of sales from comparable stores and
non-comparable stores, described below under "Comparable Store Sales." Growth
of our net sales is primarily driven by expansion of our store base in existing
and new markets. As we continue to grow, we believe we will have greater access
to brand name and closeout merchandise and an increased deal selection,
resulting in more potential offerings for our customers. Net sales are impacted
by product mix, merchandise mix and availability, as well as promotional
activities and the spending habits of our customers. Our broad selection of
offerings across diverse product categories supports growth in net sales by
attracting new customers, which results in higher spending levels and frequency
of shopping visits from our customers, including Ollie's Army members.
The spending habits of our customers are subject to macroeconomic conditions and
changes in discretionary income. Our customers' discretionary income is
primarily impacted by gas prices, wages, and consumer trends and preferences,
which fluctuate depending on the environment. However, because we offer a broad
selection of merchandise at extreme values, we believe we are less impacted than
other retailers by economic cycles. These cycles correspond with declines in
general consumer spending habits and we benefit from periods of increased
consumer spending.
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Comparable Store Sales
Comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year. Comparable store sales consists of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store's opening, which is when we believe comparability is achieved. Comparable store sales are impacted by the same factors that impact net sales.
We define comparable stores to be stores that:
• have been remodeled while remaining open;
• are closed for five or fewer days in any fiscal month;
• are closed temporarily and relocated within their respective trade areas; and
• have expanded, but are not significantly different in size, within their
current locations. Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months. Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales. Opening new stores is the primary component of our growth strategy and as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales. Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.
Gross Profit and Gross Margin
Gross profit is equal to our net sales less our cost of sales. Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.
In addition, our gross margin is impacted by product mix, as some products generally provide higher gross margins, by our merchandise mix and availability, and by our merchandise cost, which can vary.
Our gross profit is variable in nature and generally follows changes in net sales. We regularly analyze the components of gross profit, as well as gross margin. Specifically, our product margin and merchandise mix is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals. Our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross profit and results of operation. The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers. As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.
Selling, General and Administrative Expenses
SG&A are comprised of payroll and benefits for store, field support and support
center associates. SG&A also include marketing and advertising, occupancy,
utilities, supplies, credit card processing fees, insurance and professional
services. The components of our SG&A remain relatively consistent per store and
for each new store opening. The components of our SG&A may not be comparable to
the components of similar measures of other retailers. Consolidated SG&A
generally increase as we grow our store base and as our net sales increase. A
significant portion of our expenses is primarily fixed in nature, and we expect
to continue to maintain strict discipline while carefully monitoring SG&A as a
percentage of net sales. We expect that our SG&A will continue to increase in
future periods with future growth.
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Depreciation and Amortization Expenses
Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization are calculated over the estimated useful lives of the related assets, or in the case of leasehold improvements, the lesser of the useful lives or the remaining term of the lease. Expenditures for additions, renewals, and betterments are capitalized; expenditures for maintenance and repairs are charged to expense as incurred. Depreciation and amortization is computed on the straight-line method for financial reporting purposes. Depreciation as it relates to our distribution centers is included within cost of sales on the condensed consolidated statements of income.
Pre-Opening Expenses
Pre-opening expenses consist of expenses of opening new stores and distribution centers, as well as store closing costs. For opening new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs. Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store. For opening distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs. Store closing costs primarily consist of insurance deductibles, rent and store payroll.
Operating Income
Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses. Operating income excludes net interest income or expense and income tax expense. We use operating income as an indicator of the productivity of our business and our ability to manage expenses.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance. EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry. We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures. Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company's operating results. We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business. We define EBITDA as net income before net interest income or expense, depreciation and amortization expenses and income taxes. Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense and the gain from an insurance settlement. EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, see "Results of Operations."
Factors Affecting the Comparability of our Results of Operations
Our results over the past two years have been affected by the following factors, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.
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Store Openings and Closings
We opened six and eight new stores in the second quarters of fiscal 2020 and fiscal 2019, respectively. In connection with these store openings, we incurred pre-opening expenses of$1.5 million and$2.4 million for the second quarters of fiscal 2020 and fiscal 2019, respectively. We opened 23 new stores and closed two stores, one as planned and one closed temporarily due to smoke damage from a fire at an adjacent tenant, in the twenty-six weeks endedAugust 1, 2020 . We opened 29 new stores in the twenty-six weeks endedAugust 3, 2019 . In connection with these store openings and closings, we incurred pre-opening expenses of$5.3 million and$7.6 million for the twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 , respectively.
Seasonality
Our business is seasonal in nature and demand is generally the highest in our
fourth fiscal quarter due to the holiday sales season. To prepare for the
holiday sales season, we must order and keep in stock more merchandise than we
carry during other times of the year and generally engage in additional
marketing efforts. We expect inventory levels, along with accounts payable and
accrued expenses, to reach their highest levels in our third and fourth fiscal
quarters in anticipation of increased net sales during the holiday sales
season. As a result of this seasonality, and generally because of variation in
consumer spending habits, we experience fluctuations in net sales and working
capital requirements during the year. Because we offer a broad selection of
merchandise at extreme values, we believe we are less impacted than other
retailers by economic cycles which correspond with declines in general consumer
spending habits and we believe we still benefit from periods of increased
consumer spending.
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Results of Operations
The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.
We derived the condensed consolidated statements of income for the thirteen and twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 from our unaudited condensed consolidated financial statements and related notes. Our historical results are not necessarily indicative of the results that may be expected in the future. Thirteen weeks ended Twenty-six weeks ended August 1, August 3, August 1, August 3, 2020 2019 2020 2019 ( dollars in thousands) Condensed consolidated statements of income data: Net sales$ 529,313 $ 333,865 $ 878,676 $ 658,719 Cost of sales 322,471 209,832 531,468 401,952 Gross profit 206,842 124,033 347,208 256,767 Selling, general and administrative expenses 109,149 87,350 198,869 170,682 Depreciation and amortization expenses 4,122 3,512 8,066 6,921 Pre-opening expenses 1,545 2,420 5,267 7,629 Operating income 92,026 30,751 135,006 71,535 Interest income, net (26 ) (372 ) (109 ) (517 ) Income before income taxes 92,052 31,123 135,115 72,052 Income tax (benefit) expense (7,331 ) 5,953 2,276 8,165 Net income$ 99,383 $ 25,170 $ 132,839 $ 63,887 Percentage of net sales (1): Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 60.9 62.8 60.5 61.0 Gross profit 39.1 37.2 39.5 39.0 Selling, general and administrative expenses 20.6 26.2 22.6 25.9 Depreciation and amortization expenses 0.8 1.1 0.9 1.1 Pre-opening expenses 0.3 0.7 0.6 1.2 Operating income 17.4 9.2 15.4 10.9 Interest income, net - (0.1 ) - (0.1 ) Income before income taxes 17.4 9.3 15.4 10.9 Income tax (benefit) expense (1.4 ) 1.8 0.3 1.2 Net income 18.8 % 7.5 % 15.1 % 9.7 % Select operating data: New store openings 6 8 23 29 Number of closed stores - - (2 ) - Number of stores open at end of period 366 332 366 332 Average net sales per store (2)$ 1,454 $ 1,018 $ 2,441 $ 2,050 Comparable stores sales change 43.3 % (1.7 )% 20.2 % (0.5 )% ________________
(1) Components may not add to totals due to rounding.
(2) Average net sales per store represents the weighted average of total net
weekly sales divided by the number of stores open at the end of each week for
the respective periods presented.
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The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented:
Thirteen weeks ended Twenty-six weeks ended
August 1, August 3, August 1, August 3,
2020 2019 2020 2019
( dollars in thousands)
Net income $ 99,383 $ 25,170 $ 132,839 $ 63,887
Interest income, net (26 ) (372 ) (109 ) (517 )
Depreciation and amortization expenses (1) 5,653 4,337 11,063 8,536
Income tax (benefit) expense (7,331 ) 5,953 2,276 8,165
EBITDA 97,679 35,088 146,069 80,071
Gain from insurance settlement - - - (565 )
Non-cash stock-based compensation expense 1,727 2,432 3,046 4,625
Adjusted EBITDA $ 99,406 $ 37,520 $ 149,115 $ 84,131 (1) Includes depreciation and amortization relating to our distribution centers,
which is included within cost of sales on our condensed consolidated
statements of income.
Second Quarter 2020 Compared to Second Quarter 2019
Net sales increased to$529.3 million in the second quarter of fiscal 2020 from$333.9 million in the second quarter of fiscal 2019, an increase of$195.4 million , or 58.5%. The increase was the result of a comparable store sales increase of$133.2 million , or 43.3%, and a non-comparable store sales increase of$62.3 million . The increase in non-comparable store sales was driven by strong sales from new stores that have not been open for a full 15 months. Comparable store sales increased 43.3% for the second quarter of fiscal 2020. We experienced robust comparable store sales growth throughout the period, driven by a significantly larger average basket per customer and higher traffic levels. We effectively responded to changing consumer needs in the quarter, creating a strong alignment between a value-driven merchandise assortment and customer demand. We also benefited from consumer spending associated with federal stimulus funds for the COVID-19 pandemic and having our stores open during the quarter while other retailers were closed for a portion of the period.
The increase in comparable store sales in the second quarter of fiscal 2020 consisted of increases in both the average transaction size and number of customer transactions. Sales were strong across merchandise categories, particularly driven by growth in the health and beauty aids, housewares, bed and bath, floor coverings and electronics departments.
Gross Profit and Gross Margin
Gross profit increased to$206.8 million in the second quarter of fiscal 2020 from$124.0 million in the second quarter of fiscal 2019, an increase of$82.8 million , or 66.8%. Gross margin returned to historical levels for the period, increasing 190 basis points to 39.1% in the second quarter of fiscal 2020 from 37.2% in the second quarter of fiscal 2019. The increase in gross margin in the second quarter of fiscal 2020 was due to improvements in both merchandise margin, driven by increased markup, and leveraging of supply chain costs as a percentage of net sales. 19
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Selling, General and Administrative Expenses
SG&A increased to$109.1 million in the second quarter of fiscal 2020 from$87.4 million in the second quarter of fiscal 2019, an increase of$21.8 million , or 25.0%, primarily driven by an increased number of stores and higher store payroll and variable selling expenses to support the significant increase in sales. As a percentage of net sales, SG&A decreased 560 basis points to 20.6% in the second quarter of fiscal 2020 from 26.2% in the second quarter of fiscal 2019. The decrease was primarily due to significant leverage in payroll and occupancy as well as other fixed costs from the strong increase in comparable store sales as well as continued tight expense controls. This leverage was partially offset by certain increased expenses, such as premium pay of approximately$3.6 million to qualifying in-store associates and store leadership, as a result of operating throughout the COVID-19 pandemic.
Pre-Opening Expenses
Pre-opening expenses for new stores decreased to$1.5 million in the second quarter of fiscal 2020 from$2.4 million in the second quarter of fiscal 2019 due to the comparative number and timing of new store openings. We opened six and eight new stores in the second quarters of fiscal 2020 and fiscal 2019, respectively. As a percentage of net sales, pre-opening expenses decreased 40 basis points to 0.3% in the second quarter of fiscal 2020 from 0.7% in the second quarter of fiscal 2019.
Interest Income, Net
Net interest income was
Income Tax (Benefit) Expense
Income tax benefit in the second quarter of fiscal 2020 was$7.3 million compared to income tax expense of$6.0 million in the second quarter of fiscal 2019, a net variance of$13.3 million in the current year. The effective tax rates for the second quarters of fiscal 2020 and fiscal 2019 were (8.0)% and 19.1%, respectively. The decreased effective tax rate in the second quarter of fiscal 2020 was primarily the result of an increase in excess tax benefits related to stock-based compensation, largely due to the exercise of stock options, including exercises by the estate ofMark Butler , our former Chairman of the Board, President and Chief Executive Officer, as described in Note 8 of the accompanying unaudited condensed consolidated financial statements. These discrete tax benefits totaled$30.5 million and$1.7 million for the second quarter of fiscal 2020 and the second quarter of fiscal 2019, respectively.
Net Income
As a result of the foregoing, net income increased to
Adjusted EBITDA
Adjusted EBITDA increased to$99.4 million in the second quarter of fiscal 2020 from$37.5 million in the second quarter of fiscal 2019, an increase of$61.9 million , or 164.9%.
Twenty-Six Weeks 2020 Compared to Twenty-Six Weeks 2019
Net sales increased to$878.7 million in the twenty-six weeks endedAugust 1, 2020 from$658.7 million in the twenty-six weeks endedAugust 3, 2019 , an increase of$220.0 million , or 33.4%. The increase was the result of a comparable store sales increase of$123.3 million , or 20.2%, and a non-comparable store sales increase of$96.7 million . The increase in non-comparable store sales was driven by strong sales from new stores that have not been open for a full 15 months. Comparable store sales increased 20.2% for the twenty-six weeks endedAugust 1, 2020 , driven by the robust comparable store sales growth in the second quarter of fiscal 2020. The increase in comparable store sales in the twenty-six weeks endedAugust 1, 2020 consisted of increases in both the average transaction size and number of customer transactions. Top performing merchandise categories include the health and beauty aids, housewares, floor coverings, bed and bath, and lawn and garden departments. Sales growth was partially offset by declines in our book, luggage and candy departments. 20
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Index Gross Profit and Gross Margin Gross profit increased to$347.2 million in the twenty-six weeks endedAugust 1, 2020 from$256.8 million in the twenty-six weeks endedAugust 3, 2019 , an increase of$90.4 million , or 35.2%. Gross margin increased 50 basis points to 39.5% in the twenty-six weeks endedAugust 1, 2020 from 39.0% in the twenty-six weeks endedAugust 3, 2019 . The increase in gross margin in the twenty-six weeks endedAugust 1, 2020 was due to the leveraging of supply chain costs as a percentage of net sales and an increase in the merchandise margin.
Selling, General and Administrative Expenses
SG&A increased to$198.9 million in the twenty-six weeks endedAugust 1, 2020 from$170.7 million in the twenty-six weeks endedAugust 3, 2019 , an increase of$28.2 million , or 16.5%, primarily driven by an increased number of stores and higher store payroll and variable selling expenses to support the significant increase in sales. As a percentage of net sales, SG&A decreased 330 basis points to 22.6% in the twenty-six weeks endedAugust 1, 2020 from 25.9% in the twenty-six weeks endedAugust 3, 2019 . The decrease was primarily due to the leveraging of payroll and various fixed costs as a result of the comparable store sales increase and tight expense controls. This leverage was partially offset by certain increased expenses, such as premium pay of approximately$5.0 million to qualifying in-store associates and store leadership, as a result of operating throughout the COVID-19 pandemic.
Pre-Opening Expenses
Pre-opening expenses for new stores decreased to$5.3 million in the twenty-six weeks endedAugust 1, 2020 from$7.6 million in the twenty-six weeks endedAugust 3, 2019 due to the comparative number and timing of new store openings. During the twenty-six weeks endedAugust 1, 2020 , we opened 23 stores and closed two stores, one as planned and one closed temporarily due to smoke damage from a fire at an adjacent tenant. We opened 29 stores in the twenty-six weeks endedAugust 3, 2019 . As a percentage of net sales, pre-opening expenses decreased 60 basis points to 0.6% in the twenty-six weeks endedAugust 1, 2020 from 1.2% in the twenty-six weeks endedAugust 3, 2019 .
Interest Income, Net
Net interest income was$0.1 million in the twenty-six weeks endedAugust 1, 2020 compared to net interest income of$0.5 million in the twenty-six weeks endedAugust 3, 2019 . Income Tax Expense Income tax expense for the twenty-six weeks endedAugust 1, 2020 was$2.3 million compared to$8.2 million for the twenty-six weeks endedAugust 3, 2019 , a decrease of$5.9 million , or 72.1%. The effective tax rates for the twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 were 1.7% and 11.3%, respectively. The decreased effective tax rate in the twenty-six weeks endedAugust 1, 2020 was primarily the result of an increase in excess tax benefits related to stock-based compensation, largely due to the exercise of stock options, including exercises by the estate ofMark Butler , our former Chairman of the Board, President and Chief Executive Officer. These discrete tax benefits totaled$31.7 million and$9.8 million for the twenty-six weeks endedAugust 1, 2020 andAugust 3, 2019 , respectively.
Net Income
As a result of the foregoing, net income increased to
Adjusted EBITDA
Adjusted EBITDA increased to
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our Revolving Credit Facility. Our primary cash needs are for capital expenditures and working capital. As ofAugust 1, 2020 , we had$92.0 million available to borrow under our Revolving Credit Facility and$305.1 million of cash and cash equivalents on hand. OnMay 22, 2019 , we amended and restated our Revolving Credit Facility to effect several amendments thereto and extend the maturity thereunder toMay 22, 2024 . For further information, see Note 6 under "Notes to Unaudited Condensed Consolidated Financial Statements." Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems. We spent$5.7 million and$20.2 million for capital expenditures during the second quarter of fiscal 2020 and the second quarter of fiscal 2019, respectively. For the twenty-six weeks endedAugust 1, 2020 , we spent$18.1 million for capital expenditures compared to$40.4 million for the twenty-six weeks endedAugust 3, 2019 . The prior year included expenditures of approximately$9.7 million and$19.8 million in the second quarter of fiscal 2019 and the twenty-six weeks endedAugust 3, 2019 , respectively, invested in the construction of the Company's new distribution center. We expect to fund capital expenditures from net cash provided by operating activities. We opened 23 new stores during the twenty-six weeks endedAugust 1, 2020 and expect to open 46 stores, including one relocation, during 2020. However, we may experience delays in construction and permitting of new stores due to COVID-19.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.
Our primary working capital requirements are for the purchase of inventory, payroll, rent, other store operating costs, distribution costs and general and administrative costs. Our working capital requirements fluctuate during the year, rising in our third fiscal quarter as we increase quantities of inventory in anticipation of our peak holiday sales season in our fourth fiscal quarter. Fluctuations in working capital are also driven by the timing of new store openings. We believe our cash and cash equivalents position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements, debt service and other financing activities over the next 12 months. If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, we will then be required to obtain additional equity or debt financing in the future. There can be no assurance equity or debt financing will be available to us when needed or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.
We are not currently receiving, and do not currently intend to apply for, loans under any federal or state programs implemented as a result of the COVID-19 pandemic, including the CARES Act.
Share Repurchase Program
OnMarch 26, 2019 , the Board of Directors of the Company authorized the repurchase of up to$100.0 million of shares of our common stock. The shares to be repurchased may be purchased from time to time in open market conditions (including blocks or in privately negotiated transactions). The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of our shares, general market, economic, and business conditions, and other corporate considerations. Repurchases may be made pursuant to plans intended to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, which could allow us to purchase our shares during periods when we otherwise might be prevented from doing so under insider trading laws or because of self-imposed trading blackout periods. Repurchases are expected to be funded from cash on hand or through the utilization of our Revolving Credit Facility. The repurchase authorization does not require the purchase of a specific number of shares, has a two-year term, and is subject to suspension or termination by our Board of Directors at any time.
During 2019, we repurchased 689,457 shares of our common stock for
As
ofAugust 1, 2020 , we had$60.0 million remaining under our share repurchase authorization. There can be no assurances that any additional repurchases will be completed, or as to the timing or amount of any repurchases. 22
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