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 of
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 to
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the
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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.
COVID-19 Update
The COVID-19 pandemic has led to adverse impacts on the
We continue to take measures to protect the health and safety of our associates and customers, a primary concern of our management team. We have also taken measures to support the communities that we serve to address the challenges posed by the pandemic.
Our net sales have benefited from increased consumer spending associated with federal stimulus funds for the pandemic. We are experiencing labor pressures in our stores and distribution centers as well as supply chain disruptions due to COVID-19 and related measures. We are increasing our hiring efforts in certain impacted markets and working closely with our suppliers and transportation partners to mitigate the impact of the supply chain challenges. While labor pressures and supply chain disruptions as a result of the pandemic have been manageable to date, we will continue to assess and respond to current and evolving conditions.
As we continue to monitor the COVID-19 pandemic and potentially take actions based on the requirements and recommendations of federal, state and local authorities, we intend to focus on managing the business for future, long-term growth. In certain circumstances, there may be developments outside our control requiring us to adjust our operating plan. As such, given the evolving nature of the pandemic, we cannot reasonably estimate its impact on our financial condition, results of operations or cash flows in the future. Refer to Part I, Item 1A. Risk Factors of our 2020 Form 10-K for a full discussion of the risks associated with the COVID-19 pandemic.
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 397 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.
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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
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.
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.
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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 that correspond with declines in general consumer spending habits. We believe we also benefit from periods of increased consumer spending.
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 consist 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.
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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 expense, occupancy costs for stores and the store support center, insurance, corporate infrastructure and other general expenses. 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.
Depreciation and Amortization Expenses
Property and equipment are stated at original cost less accumulated depreciation and amortization. Depreciation and amortization expenses 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 are 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.
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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. 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 net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA, 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.
Historical Results
Historical results are not necessarily indicative of the results to be expected for any future period.
Store Openings and Closings
We opened 11 new stores and closed two stores in the first quarter of fiscal
2021 and opened 17 new stores and closed two stores in the first quarter of
fiscal 2020. In connection with these store openings and closings, we incurred
expenses of
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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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 first quarter of fiscal 2021 and the first quarter of fiscal 2020 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
May 1, May 2,
2021 2020
( dollars in thousands)
Condensed consolidated statements of income data:
Net sales $ 452,492 $ 349,363
Cost of sales 269,882 208,997
Gross profit 182,610 140,366
Selling, general and administrative expenses 104,370 89,720
Depreciation and amortization expenses 4,484 3,944
Pre-opening expenses 2,535 3,722
Operating income 71,221 42,980
Interest income, net (25 ) (83 )
Income before income taxes 71,246 43,063
Income tax expense 16,026 9,607
Net income $ 55,220 $ 33,456
Percentage of net sales (1):
Net sales 100.0 % 100.0 %
Cost of sales 59.6 59.8
Gross profit 40.4 40.2
Selling, general and administrative expenses 23.1 25.7
Depreciation and amortization expenses 1.0 1.1
Pre-opening expenses 0.6 1.1
Operating income 15.7 12.3
Interest income, net - -
Income before income taxes 15.7 12.3
Income tax expense 3.5 2.7
Net income 12.2 % 9.6 %
Select operating data:
Number of new stores 11 17
Number of closed stores (2 ) (2 )
Number of stores open at end of period 397 360
Average net sales per store (2) $ 1,150 $ 986
Comparable stores sales change 18.8 % (3.3 )%
________________
(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
May 1, May 2,
2021 2020
(in thousands)
Net income $ 55,220 $ 33,456
Interest income, net (25 ) (83 )Depreciation and amortization expenses (1) 5,918 5,410 Income tax expense
16,026 9,607
EBITDA 77,139 48,390
Non-cash stock-based compensation expense 2,020 1,319 Adjusted EBITDA
$ 79,159 $ 49,709
(1) Includes depreciation and amortization relating to our distribution centers,
which is included within cost of sales on our condensed consolidated
statements of income.
First Quarter of Fiscal 2021 Compared with the First Quarter of Fiscal 2020
Net sales increased to
Comparable store sales increased 18.8% in the first quarter of fiscal 2021 compared with a 3.3% decrease in the first quarter of fiscal 2020. The robust sales increase reflects our ability to create a strong alignment between our value-driven merchandise assortment and customer demand. We also benefited in the quarter from increased consumer spending associated with a third round of federal relief funds for the ongoing COVID-19 pandemic. Comparable store sales in the first quarter of fiscal 2020 were impacted by decreased store traffic and consumer demand in the initial consumer reaction to the pandemic, partially offset by increased spending associated with the first round of federal economic stimulus late in the quarter.
The increase in comparable store sales in the quarter consisted of an increase in both the number of transactions and average transaction size. Best performing departments included bed and bath, flooring, lawn and garden, electronics, books and toys. Sales in our health and beauty aids department decreased in the quarter due to a surge of COVID-related personal protective equipment sales in the prior year.
Gross Profit and Gross Margin
Gross profit increased to
Selling, General and Administrative Expenses
SG&A increased to
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Pre-opening expenses for new stores decreased to
Interest Income, Net
Net interest income was
Income Tax Expense
Income tax expense was
Net Income
As a result of the foregoing, net income increased to
Adjusted EBITDA
Adjusted EBITDA increased to
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 of
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
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.
Based on our new store growth plans, 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 Coronavirus Aid, Relief, and Economic Security (CARES) Act.
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Share Repurchase Program
On
During the first quarter of fiscal 2021, we repurchased 110,622 shares of our
common stock for
Subsequent to
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