Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q4 2023 Earnings Call Transcript

Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI) Q4 2023 Earnings Call Transcript March 20, 2024

Ollie’s Bargain Outlet Holdings, Inc. beats earnings expectations. Reported EPS is $1.23, expectations were $1.16. OLLI isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to Ollie’s Bargain Outlet’s Conference Call to discuss financial results for the Fourth Quarter Fiscal 2023. Currently, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and an interactive instruction will follow at that time. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie’s. Joining us today’s call from Ollie’s management are John Swygert, President, and Chief Executive Officer; Eric van der Valk, Executive Vice President, and Chief Operating Officer; and Robert Helm, Senior Vice President, and Chief Financial Officer. Certain comments made today may constitute forward-looking statements and are made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended.

Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our annual report on Form 10- and quarterly reports on Form 10-Q on file with the SEC and the earnings press release. Forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update these statements. On today’s call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to non-GAAP financial measures are included in our earnings press release. With that said, I will now turn the call over to Mr. Swygert.

Please go ahead, sir.

John Swygert: Thank you and good morning everyone. We appreciate you joining our call today. We had a strong fourth quarter and fiscal year. For the fourth quarter, we delivered better than expected top and bottom line results. Comparable store sales increased 3.9%, our seventh consecutive quarter of positive comps. Our comp store sales growth was broad-based with over 60% of our product categories comping positive in the quarter. In addition to the solid comp store sales growth, we also delivered very strong margin growth. Gross margin increased 290 basis points to 40.5%, which in turn helps us deliver a 46% increase in adjusted earnings per share. The fourth quarter capped off a great year for Ollie’s. Fiscal 2023 marked a return to the strong financial performance and consistent execution that are hallmark at Ollie’s.

We are proud of our team’s achievements this past year, which included a number of records and milestones. In fiscal 2023, we generated record net sales and crossed the $2 billion mark for the first time in our 41-year history. We opened our 500th store and entered our 30th state. We returned to our long-term outlook gross margin target of 40% in the second half of the year. We added a record 3.6 million new Ollie’s army members and grew to almost 14 million active members strong. We beat and raised our four-year sales and earnings estimates in all four quarters and most importantly, we returned to a pattern of consistent execution and strong financial results. We feel very good about the underlying trends in our business and our focus on long-term growth.

We recently completed our latest third-party real estate feasibility study, which utilizes demographic data and density across a changing US landscape. The migration trend out of larger metropolitan markets into rural and suburban areas over the past few years is a positive trend for Ollie’s, and our analysis supports a new long-term target of 1,300 stores, up from a previous 1,050. Everyone loves to bargain, and as consumers seek value, we are positioned to win. We sell good stuff cheap, high-quality name-brand products at prices typically 20% to 70% below the fancy stores. Since our founding over 41 years ago, we have built our model around closeouts and bargains. In doing so, we have developed deep relationships throughout the vendor community, built an experienced team of talented buyers, and set up our distribution network to handle deals of all shapes and sizes in a cost-effective and agile manner, and developed a trusted and loyal customer following.

Today, consumers are looking for bargains and manufacturers are looking for trusted partners who can help them manage their inventories and supply chains. Larger retailers are being supplied by larger manufacturers, and this leads to larger orders and product flow. At the same time, manufacturers are constantly developing and introducing new products, new packaging, and working around endless changes and disruptions to the marketplace and supply chain. This is driving strong growth in the closeout market. We are the king of closeouts, and we are built for this environment. Nobody has our experience, size, scale and credibility in the closeout market. With over 41 years of history and extensive relationships, manufacturers know we are a trusted and reliable partner for accessing closeout products.

As a result, our purchasing power is growing, and we’re becoming more and more meaningful to the vendor community. We have made significant investments to enhance execution and drive productivity. We have invested in wages across the entire company, our distribution centers, our stores, the field management teams and store support center. We have enhanced major operational teams such as the supply chain, loss prevention, real estate and marketing, expanded our distribution capabilities, implemented new technology and systems, initiated a store remodel program and retooled our marketing campaigns and expanded our digital capabilities. Clearly, these investments are paying off. Our customer base is expanding, our productivity levels are increasing and our costs are well under control.

In short, we’re executing well and delivering strong and consistent financial results. Now, let me turn the call over to Eric.

Eric van der Valk: Thanks, John and good morning, everyone. Our fourth quarter and fiscal year results reflect the strength of our deals, the hard work and commitment of our team, and our execution across the organizations. Process improvements and investments we have made in our people, supply chain, stores and marketing, continue to drive better productivity and strong results. Our growth is focused on a number of core initiatives, offering amazing deals, expanding our reach through new store openings, digital marketing and Ollie’s army, leveraging investments to drive operating efficiencies and execution. In the fourth quarter, we opened seven new stores and hit our target of 45 new store openings for the fiscal year. The 30 store openings in the back half of the year was a new record.

We continue to pursue a contiguous growth real estate strategy that leverages brand awareness, marketing reach and our supply chain. With the opening of our 500 store in Iowa City, we now operate in 30 states. In fiscal 2024, we are targeting to open approximately 50 new stores with a good portion of these in existing markets and the Midwest. In addition to opening new stores, we continue to upgrade our existing stores through our remodel program. Over 10% of our store base has now been remodeled and we are applying our learnings to both existing stores and new store designs.

Operator: Ladies and gentlemen, please stand by. Your program will resume momentarily. Once again, please stand by. Your program will resume momentarily.

Eric van der Valk: Michelle, are you able to hear us?

Operator: Yeah. Hi. I can hear you now. All right. Great. Yes. You may proceed.

John Rouleau: Okay. Again, everybody, we apologize for the technical difficulties. We’re going to resume, the Ollie’s conference call, with Eric starting back in on his portion. Thank you, everybody.

Eric van der Valk: Thank you, John Rouleau. Thank you, John Swygert. Good morning, everyone. Our fourth quarter and fiscal year results reflect the strength of our deals, the hard work and commitment of our team, and the execution across the organization. Process improvements and investments we have made in our people, supply chain, stores and marketing continue to drive better productivity and strong results. Our growth is focused on a number of core initiatives, offering amazing deals, expanding our reach through new store openings, digital marketing, and Ollie’s army, and leveraging investments to drive operating efficiencies and execution. In the fourth quarter, we opened seven new stores and hit our target of 45 new store openings for the fiscal year.

The 30 store openings in the back half of the year was a new record. We continue to pursue a contiguous growth real estate strategy that leverages brand awareness, marketing reach and our supply chain. With the opening of our 500th store in Iowa City, we now operate in 30 states. In fiscal 2024, we are targeting to open approximately 50 new stores, with a good portion of these in existing markets and the Midwest. In addition to opening new stores, we continue to upgrade our existing stores through our remodel program. Over 10% of our store base has now been remodeled and we are applying our learnings to both existing stores and new store design. Our new distribution center in Illinois will support our continued growth in the Midwest and is on track to start up full operations in the second half of this year.

Our fourth distribution center expands our capacity to service an additional 150 stores to 175 stores. When combining this with investments we’ve made over the past year, we will have the ability to service up to 750 stores. On the marketing front, we continue to shift advertising dollars into various digital and social media platforms, including influencers across TikTok, Instagram and Facebook. For Black Friday and Christmas, we tested a series of video ad formats that generated millions of views and over a billion impressions in Google channels, including YouTube. Our digital flyer registered over 300 million impressions with Facebook and Instagram users. Our expanded digital marketing program is helping us to reach new and younger customers and keeping Ollie’s the birthplace of bargains, top of mind with existing customers.

Our growing customer base is reflected in our Ollie’s army numbers. As John mentioned, we had a record year in customer additions with over 3.6 million customers added to Ollie’s army this year alone. In line with the growth in the younger customer demographic we are attracting, we are also seeing growth in younger customers joining Ollie’s army. Lastly, we continue to benefit from the trade-down effect we have experienced over the last several quarters and are seeing strong retention from this customer cohort. Touching on supply chain for a moment, our annual international carrier contracts are renegotiated every May. This is an area where we have made significant improvements over the past few years. We have overhauled our team, brought in new systems to improve visibility and execution, and increased the number of direct carrier relationships.

Most importantly, we have leveraged our volume to negotiate favorable annual contracts in terms. Now, almost 90% of our foreign shipping requirements are covered under contract. As a result, we have very little exposure to the spot market. As a reminder, around 20% of our overall purchases are imports. In addition, we have not seen any meaningful impact from the shipping disruptions through the Suez Canal and our import costs remain well controlled. Like other retailers, we don’t know what could happen to import tariffs as a result of the upcoming Presidential Election, but do want to remind everyone that we negotiate pricing fluidly based on prices in the marketplace on a relatively short-term basis. If prices were to increase from the implementation of new tariffs, we would adjust our buying accordingly and offer the same compelling value to our customers, while delivering margin within our targeted parameters.

We continue to watch the real estate market closely. While the market is a bit tight at the moment, we think this could start to loosen up with some of the more recent and potentially forthcoming foreclosures and bankruptcies. The strength of our business model, and particularly our balance sheet, provides us with the positioning to seize this opportunity as it arises. Before I turn the call over to Rob, I would like to take a moment to thank our incredible team of associates who are value-obsessed and committed to executing the different areas across our business day in, day out. John alluded to the consistent results we delivered this quarter, and this is only possible when our entire team is working together to execute the business. Rob?

Rob Helm: Thanks, Eric, and good morning, everyone. We’re extremely pleased with our fourth quarter and full year results, which came in ahead of our expectations, driven by strong sales growth and healthy margin expansion. Our fourth quarter adjusted earnings per share was a new record number for Ollie’s. For the year, we achieved a record $2.1 billion in net sales, expanded gross margin by 370 basis points, and increased adjusted earnings per share by 80%. In the fourth quarter, net sales increased 18% to $649 million, driven by new store growth, comparable store sales growth and the 53rd selling week. Our comparable store sales increased 3.9% and was driven primarily by transactions. Our category strength was broad-based, with over 60% of our product categories comping positive.

Our best-performing categories were food, seasonal, candy, housewares and sporting goods. Finally, the 53rd selling week added approximately $34 million to net sales in the quarter. Ollie’s army increased 5.9% to 14 million members, and sales to our members represented over 80% of total sales. As both John and Eric mentioned, we added a record 3.6 million members in 2023, and the number of non-active members purging from Ollie’s army is moderating. This should bode well for net member growth going forward. During the quarter, we opened seven new stores, ending with 512 stores in 30 states, an increase of 9.4% year-over-year. The timing of our new store openings did slightly impact new store productivity in the quarter, but our new stores continue to ramp and perform in line with our expectations and pro forma models.

Gross margin improved 290 basis points to 40.5% compared to last year, primarily driven by favorable supply chain costs and a higher merchandise margin, driven by lower shrink. SG&A expenses as a percentage of net sales increased 30 basis points to 24.1% due to higher incentive compensation, partially offset by leverage of fixed expenses on the increase in net sales. Operating income increased 44.3% to $98 million, and operating margin increased 270 basis points to 15% in the quarter. Adjusted net income increased 45.5% to $76 million and adjusted earnings per share was $1.23 compared to $0.84 last year. Adjusted EBITDA increased 43.2% to $111 million, and adjusted EBITDA margin increased 300 basis points to 17% for the quarter. Turning to the balance sheet, our cash position remains strong, with $353 million between cash on hand and short-term investments, and no outstanding borrowings under our revolving credit facility, which we extended for another five years at favorable economics to the current market conditions.

For the full year, we generated $254 million in cash from operations. Inventory increased 7.5% to $506 million, primarily driven by new store growth, partially offset by the impact of lower capitalized freight costs. Capital expenditures totalled $43 million for the quarter, and were primarily for the development of new stores, the remodeling of existing stores, and the construction of our new distribution center in Illinois. During the quarter, we invested $13 million to repurchase shares of our common stock. We repurchased 53 million during the year, and have 86 million remaining on our current share repurchase program authorization. We remain committed to returning capital to our investors through share repurchases, while balancing our strategic growth opportunities and working capital needs.

Turning to our outlook for 2024, as John mentioned, we continue to benefit from a strong closeout market, as well as improved execution across many facets of our business. While we entered the year with nice momentum, we always initially planned the year around our long-term algo of 1% to 2% positive comp growth for purposes of setting our cost structure and leverage points. With that framework in place, for the full year, which is a 52-week year, compared to 53 weeks in 2023, we expect total net sales of $2.248 billion to $2.273 billion, comparable store sales growth of 1% to 2%. The opening of 50 new stores left two closures where we chose not to renew, gross margin of approximately 40%, operating income of $243 million to $251 million, adjusted net income of $192 million to $198 million and adjusted net income per diluted share of $3.10 to $3.20 and annual effective tax rate of 25%, which excludes the tax benefits related to stock-based compensation, diluted weighted average share is outstanding of approximately 62 million and lastly, capital expenditures of approximately $85 million, including approximately $30 million for the completion of our distribution center in Princeton, Illinois.

Now let me provide some color on how we’re thinking about quarterly comps and store opening cadence, as well as a few other numbers to help with your models. With our continued momentum, we expect to deliver Q1 comps slightly above the high end of our annual guidance range. For Q2, we are planning comps to the midpoint of our annual guidance range. For Q3, we anticipate comp sales to be flat due to a change related to the calendar shift from the 53rd week and as a result of the shift, we would expect Q4 comps to be slightly above the high end of our annual guidance range. For new stores, we’re modelling approximately 30% of our openings in the first half, and 70% of our openings in the second half. Related to store openings, we expect pre-opening expenses, including expenses associated with our remodel program, to be approximately $17 million for the year.

In terms of gross margin, we anticipate most of our improvements occur in the first half of the year, as we lap our stronger results in the second half of the year. We’re planning for depreciation and amortization expense of approximately $42 million, which includes $11 million that runs through cost of goods sold and lastly, we expect net interest income of approximately $13 million, which considers a higher average cash balance for the year, partially offset by the impact of the potential for lower interest rates in the back half of the year. Now let me turn the call back over to John.

John Swygert: Thanks, Rob. Operating a closed-out retail business is not for the faint of heart. It takes a lot of dedicated team members who are passionate about selling good stuff cheap to execute our model. We know the holiday season was a very busy time for our associates this year, and I want to congratulate our team for the way they managed the business and delivered results. I am very proud of their performance this past quarter and year. As we say, we are; We are Ollie’s! That concludes our prepared remarks, and we are now happy to take your questions. Operator?

Operator: [Operator instructions] And our first question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question, please.

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Q&A Session

Brad Thomas: Hi. Good morning. Thanks for taking my question and congrats on a strong 2023. John, I just wanted to circle back on a question that we’ve been asking and investors have been asking really for the past year as you’ve started to see this strong momentum in your business. Can you talk a little bit more about the line of sight on sourcing and your confidence that you can comp the comp as we move here through 2024?

John Swygert: Yeah, Brad, this is a question we’ve gotten for a long period of time. With regards, we’ve been doing this for 41 years. The relationships we’ve built over that time period are very, very strong. Closeout, the closeout market is a very large market. As we said before, when I first started talking about it, it was an $80 billion market. Now it’s probably close to $115 billion market and we just surpassed a $2 billion sales number for this year. So there’s plenty of excess inventory out in the marketplace, so that does not bother us or the company to be able to comp the comp or find their source deals. The deal flows are very, very strong and have been strong and they’ll continue to be strong. So that doesn’t bother us from that perspective.

A line of sight’s always been the major question because we’re buying closeouts, we’re not manufacturing goods. So we don’t see too far out. I can’t tell you what we’re going to buy in June and July, but when you do, when you’re living this every day, you do have and feel the momentum that’s out there and the surplus is sitting in the marketplace. So, with our continued size and scale, we’ve become much, much more meaningful and built these relations with the manufacturers and we believe we’re positioned to continue to deliver the results and we’re not afraid of that.

Brad Thomas: That’s very helpful, John. And as a related follow-up, it’s encouraging to see the increased long-term store targets. Can you talk a little bit more about the work on the sourcing side and the merchandising side that goes into your confidence in supporting that increased store base?

John Swygert: Yeah, as we’ve talked about for a long time, Brad, we got this question at 100 stores, we got this question at 200 stores. The deals keep getting bigger and bigger and our relationships with the direct manufacturers keep getting bigger and bigger and as we scale and we get more coverage of the United States, the facilities that they operate in continue to be a natural fit for us. So the store count and I think people always get worried about other folks who have been in the closeout industry and they’ve not succeeded over many years. This is all we’ve done. We’ve never gone away from our knitting. This is what we’ve done for 41 years. This is all our buyers focus on each and every day. So we’re committed to closeouts.

It’s definitely an inconvenience business, but like we said, this is something that we live and breathe every day and this doesn’t bother us from a scale perspective. We’ve talked about in the past, as we scale up our store base, do closeouts become a slightly smaller percentage of the overall purchases? Sure, it does. I don’t think the customer ever notices that and I do think our merchants will continue to push and deliver closeouts. So I never see us getting below a 50% closeout in our total business. I just think there’s enough abundance out there for us to be continuing to drive that and drive that shopping experience for our customers.

Eric van der Valk: Brad, this is Eric. I’ll just add on a comment that this is a fragmented marketplace, the closeout business, and our size is a differentiator, a very important differentiator as we continue to grow. It also highlight that we have a very strong balance sheet, which is another piece that makes us stand apart from others that are in this business.

Brad Thomas: I appreciate it. Thanks, guys.

Operator: And our next question comes from the line of Kate McShane from Goldman Sachs. Your question, please.

Kate McShane: Hi, good morning. Thanks for taking our question. We wondered what impact you might be seeing. It sounds like the guide on Q1 same-store sales is pretty solid, but just what impact you might be seeing as the tax refunds here seem to be a little bit slower coming in versus last year, and if it’s having any kind of impact on you?

Rob Helm: Hey, Kate. This is Rob. The tax refund piece has been widely reported, and it’s something certainly that we’re tracking. Obviously, more liquidity for our customers and their wallets is good for business, good for all resellers. To date, we haven’t really seen it have a significant impact coming off of last year. I think the IRS has reported they’re about a week behind, but average refunds that are going into customers’ hands are bigger. So, net-net, I would say not much of an impact so far.

Kate McShane: Okay. Thank you. And then our second question was just on remodels. Can you remind us again the list that you get from the remodels and what the cadence in 2024 will look like?

Eric van der Valk: Kate, its Eric. We expect a big single-digit list for remodels. We’re repositioning the program a bit going forward. So we’ll talk about full remodels where we’re reorganizing the store, potentially installing racetracks, reflowing the stores, changing adjacencies, etcetera. We expect that. We expect to remodel around 20 stores. We’re also touching at least 30 stores with some degree of updating, which includes installing front-end queues, wayfinding and some other adjustments. So it’s really going forward, we’re learning from our experience in the remodel program what gets us the biggest return and what improves the customer experience the most and we’re investing in those elements in more stores as we move forward.

Operator: And our next question comes from the line of Peter Keith from Piper Sandler. Your question, please.