Ollie’s Bargain Outlet Holdings, Inc. (NASDAQ:OLLI)
Q3 2016 Results Earnings Conference Call
December 07, 2016 04:30 PM ET
Mark Butler - Chairman, President and CEO
John Swygert - EVP and CFO
Jay Stasz - SVP, Finance and Chief Accounting Officer
Matthew Boss - JP Morgan
Brad Thomas - KeyBanc
John Gugliuzza - Jefferies
David Mann - Johnson Rice
Edward Kelly - Credit Suisse
Michael Lehrhoff - RBC Capital Markets
Patrick McKeever - MKM Partners
Good afternoon and welcome to the Ollie’s Bargain Outlet Conference Call to discuss Financial Results for the Third Quarter of Fiscal 2016. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie’s. And as a reminder, this call is being recorded.
On the call today from management are Mark Butler, Chairman, President, and Chief Executive Officer; and John Swygert, Executive Vice President and Chief Financial Officer; and Jay Stasz, Senior Vice President of Finance and Chief Accounting Officer.
I will now turn the call over to Mr. Stasz to get started. Please go ahead, sir.
Thank you, and hello everyone. A press release covering the Company’s third quarter fiscal 2016 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section on the Company’s website. I also want to remind everyone that management’s remarks on this call may contain certain forward-looking statements including predictions, expectations, estimates or other information that might be considered forward-looking, and that actual results could differ materially from those mentioned on today’s call.
Any such items including our outlook for fiscal year 2016 and details relating to our future performance should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which speak only as of today, and the Company undertakes no obligation to update or revise them for any new information or future events. Factors that might affect future results may not be in our control and are discussed in our filings with the SEC.
We encourage you to review these filings, including the Company’s Annual Report on Form 10-K and quarterly reports on Form 10-Q, for a more detailed description of these factors. Please also note that we will be referring to certain non-GAAP financial measures on today’s call such as adjusted operating income, EBITDA, adjusted EBITDA, adjusted net income, and adjusted net income per diluted share that we believe may be important to investors to assess the operating performance of our business. Reconciliations of these non-GAAP financial measures to the most closely comparable GAAP financial measures are included in our earnings release.
I will now turn the call over to Mark.
Thanks, Jay, and hello to everyone. We had a strong third quarter and are pleased with our results. We’re delivering against our long-term growth targets we laid out during our IPO over a year ago and feel very good about the trends in our business. Specifically, our long-term growth target is to increase annual earnings by approximately 20% by combining mid-teen store growth with low-single-digit increases in comp store sales and modest expense leverage. This is our growth algorithm; and once again, we have met or exceeded our goals in this quarter.
On the new store growth front, we opened 16 new stores during the quarter and ended the period with a total of 232 stores in 19 states, an increase of 16% from the third quarter last year. This is right in line with our target of mid-teen store growth, and we remain pleased with our ability to open new stores. As many of you know, we have a very-disciplined approach in our new store opening process, and this has led to a very consistent performance across our store base. During the quarter, we opened up stores in 10 different states including Florida. We now have 7 stores in the state of Florida and these stores continue to perform in line or above our expectations.
On the comparable store sales front, we increased comp store sales by 1.8% in the quarter, and this is right in line with the commentary on our last earnings call and our long-term target. We are very pleased with this performance. And we have been telling you for the past several quarters, we are gaining better access to merchandise through increased scale and visibility, this is allowing our merchants to be even more selective in their buys. The third quarter was a great example of this. We saw some amazing deals in particular in our health and beauty category, and benefitted from stronger relationships with several major suppliers. Other top performing categories were electronic accessories; seasonal, primarily Halloween and Christmas stuff; pets and automotive.
During the quarter, growth in Ollie’s Army remained strong. In addition, Ollie’s Army members continue to spend significantly more than non-members. We completed our first test of coupon serialization during the quarter and we are pleased with the results. This is a steppingstone to improving the way we communicate with our Ollie’s Army members. And we expect to complete our initial rollout of this project by the end of this fiscal year. Our most exciting night of the year is Ollie’s Army Night and it’s this Sunday, December 11th. One night a year, our stores are open only to Ollie’s Army members and we reward them with special discounts. It’s our way of saying thanks to our best and most loyal customers by giving them something special. It’s really a great event and is important part of our culture. Our stores are loaded with great deals and our team is ready to serve our most loyal Ollie’s Army customers. If you’re a member, we hope to see you there. I will tell you it will be packed.
I know I’ve said it before, but I think it bears repeating. One of the hallmarks of our business is consistency. Our team knows how to execute our strategy and deliver results. This culture of consistent execution has proven incredibly successful for Ollie’s over the last 34 years. We’re not about to change our approach to running the business. Going forward, we will remain on focused on expanding our store footprint in contiguous states in both new and existing markets, further enhancing our relationship with vendors and manufacturers to secure better access to merchandise, leveraging our overall cost structure to ensure that we are operating efficiently, investing back into the business as appropriate and generating strong return to our shareholders.
In summary, we are pleased with our strong third quarter results and the overall trends in the business. America’s always loved to bargain, and this will never ever, ever go out of style. We are well-positioned to continue to deliver those bargains to our customers and delivering against our long-term objectives to shareholders.
I also want to take a moment to thank our more than 6,000 team members for their hard work and their dedication each and every day. We’ve come a long way in 34 years. We are still a family that cares about each other and takes pride in what we do. The holidays are obviously a very busy time of the year for Ollie’s and our associates. And I know, I know how hard you work. We hope you get to spend some quality time with the family and friends this season, and thanks to all of you for your efforts and your dedication.
With that, I’ll turn the call over to John to take you through our third quarter financial results in more detail.
Thanks, Mark. And good afternoon, everyone. As Mark said, we had another strong quarter and are pleased with our results. Net sales increased 15.7% to $202 million. Comparable store sales increased 1.8% versus an increase of 3.2% in third quarter of last year compared to an increase of 9.4% on a two-year stock basis. The increase in comparable store sales was driven by an increase in both the number of transactions and transaction size.
We opened 16 stores during the quarter ending with 232 stores in 19 states versus 200 stores in 17 states last year. Our new stores continue to perform in line or above our expectations, and we remain pleased with the productivity of our store base.
Gross profit increased 20.4% to $84.2 million and gross margin increased 160 basis points to 41.7%. The gross margin increase was driven by favorable transportation and distribution center costs, as our merchandise margin was flat to last year.
SG&A expenses increased 16.8% to $60.5 million in the quarter, this included a $586,000 of transaction-related expenses from our secondary stock offering in September. The increase was primarily related to higher selling expenses from our new stores opened over the past year, increased sales volumes as well as public company expenses. Excluding transaction-related expenses, SG&A as a percentage of sales was flat to last year at 29.7% in the third quarter.
Pre-opening expenses were $2.9 million versus $2.4 million in the third quarter of last year. The slight increase was related to timing differences in the number of new stores opened during the third quarter. Operating income in the quarter increased 33.8% to $18.6 million, and operating margin increased 120 basis points to 9.2%. Excluding transaction-related expenses, adjusted operating income increased 38% to $19.2 million and operating margin increased 150 basis points to 9.5%. Our effective tax rate was 39.3% versus 36.5% in the third quarter of last year. The tax rate in the prior year quarter was lower due a discreet tax benefit realized from the finalization of employment based tax credit.
Net income increased 54.7% to $10.5 million and net income per diluted share increased 54.5% to $0.17 from $0.11 last year. Excluding transaction-related expenses, adjusted net income increased 60% to $10.8 million and adjusted net income per diluted share was $0.17 versus $0.11 last year. Looking at a couple of other non-GAAP metrics, EBITDA increased 30.8% to $21.3 million and adjusted EBITDA increased 34% to $23.6 million for the quarter.
At the end of the third quarter, we had $36 million in cash and no outstanding borrowings on our $100 million revolving credit facility. During the quarter, we paid down approximately $1.3 million of our term loan debt and ended the quarter with total debt of $196.3 million versus $232 million at the same time last year. Capital expenditures were $4.3 million in the third quarter versus $4.9 million in the same period last year.
Turning to our outlook for the full year of fiscal 2016, we expect the following. Total net sales of $882 million to $885 million, raising the low end of our range while keeping the high end of our range consistent with our prior guidance. Comparable store sales growth of 2.5% to 3% consistent with our prior guidance; the opening of 31 new stores and no closures; operating income of $100 million to $101 million, which is up from our prior guidance of $96 million to $98 million; net income per diluted share of $0.91 to $0.92, up from previous guidance of $0.87 to $0.89 per diluted share. This assumes a full year tax rate of 38.4% versus our previous assumption of 38.2%. It also assumes a diluted share count of 62.5 million shares which is unchanged from prior guidance. Excluding transaction-related expenses, which we expect adjusted net income per diluted share to be $0.92 and $0.93, and this is up from prior range of $0.88 to $0.90. Finally, capital expenditures are now expected to be $17 million to $18 million, up slightly from our prior estimate of $16.5 million to $17.5 million.
As previously discussed, we faced our most challenging sales comparison of the year in the fourth quarter with a comparable store sales increase of 14% on a two-year stack basis. We continue to feel very good about the underlying trends in the business. Our deal flow remains strong, and we continue to benefit from better access to merchandise, growing relationships with vendors, and our increased size and scale. As always, we will remain conservative yet confident in the way we plan the business and our full year outlook.
And with that said, we would like to turn the call back over to the operator to start the Q&A session. Operator?
[Operator Instructions] Our first question comes from the line of Matthew Boss from JP Morgan. Your question please.
Thanks, guys. So within gross margin, can you just talk about the puts and takes you saw this quarter on the merchandise margin front? And with overall EBIT margin approaching 11% this year, what’s the best way to rank opportunities from here, on the overall margin front?
Yes. Matt, this is John. With regard to the overall margin, obviously, the mix for the quarter was pretty strong. But on the overall merch margin, we came in flat to last year at 47.5. So, we are starting to see that stabilize a little bit, mostly upside that we’ve seen this year has been related to the distribution and transportation side of the business, which obviously we saw here in the third quarter, about 160 basis-point improvement over last year. We don’t expect to see that type of improvement continue in spread over the remaining portion of this year and definitely not to next year.
We’re continuing to try to get -- we’re obviously going to get back to 40% gross margin this year. But we’re going to try to maintain the 40% gross margin on long-term basis and give that savings back to the customer and better pricing and better value to be able to continue to drive the business. So, we’re not necessarily looking to expand our margins. We believe our margins, I would say, world class, and we like to maintain where they’re in the 40%; so, we’re going to try land next year. And obviously we’ve done pretty good this year getting back a little bit quicker on the distribution and transportation leverage side of the business. But we think we’ll see that moderate here in the first quarter of next year.
Great. And then just a follow-up, any comments on the cadence of the quarter, what you saw from the top-line perspective? And then just any color maybe on November, a lot of choppiness out there, sounds like most people’s second half better than front. And then, just with that pipeline of deals, be carious what you’re seeing today versus maybe a year ago?
Yes. Matt, let me take the first part of the question and then I’ll give Mark the second part of the question. With regards to the third quarter, we saw pretty consistent results throughout the quarter. We did see a little better performance in the months of August and October compared to September. But September was grown up against pretty strong performance from last year. So, we’re pretty excited to see that. But it was consistent throughout the overall third quarter performance from that perspective. But in terms of Q4, I’ll let Mark comment on that front as well.
As you know, Matt, we don’t go too deep in the comp on a month-to-month basis, but to give you a little bit of color, I felt very, very good about November. I think that the holiday weekend was quite consistent with what our expectations were. So, I’m feeling very good. I think that the flow of merchandise to answer that question is quite, quite consistent with last year. I think the buyers are definitely able to pick and choose their spots. We continue to open up relationships with major manufacturers, in particular some CPGs, and really are having very strong access to merchandise. So, I feel really, really good, very consistent with where I did last year, I’m feeling really good.
Great. Best of luck, guys.
Thank you. Our next question comes from the line of Brad Thomas from KeyBanc. Your question, please?
Yes. Thanks so much and congratulations on another good quarter here guys. Just a follow-up on Matt’s last question. Just as we think about the fourth quarter, obviously, you’ve got full year comp guidance that you reiterated. But any particular range that you would steer us towards in terms of expectations for a fourth quarter comp?
Yes. Brad, this is John. We have not changed any of our expectations for Q4 from our Q2 call that we had. We are -- obviously, as you know, we are going up against a pretty big two-year stack at a 14% number. So, we are obviously conservative in our overall numbers. We are -- we have guided everyone to the low end of 1 to 2 on Q4 basis. We are not changing that at this point in time; we are sitting with where we think we should be.
Great. And then, you said that coupon serialization, pleased with how it’s starting. Just operationally, what stage are we in? What evidence or response you’re seeing out of the customer at this point? And how enthusiastic are you as we look at what it might be able to do the business for 2017?
Sure. Brad, this is John again. With regard to the serialized coupon, that was kind of the first steppingstone to be able to track and communicate directly with a consumer on a specific, I’ll call, UPC basis where we actually know with the customer is, and then control their shopping patterns from the standpoint of being able to use a coupon onetime only, and we know what they bought when they came in and be able to track that on a much more easier basis than we’ve had historically. So, we are just -- that was our first task, we’re just starting to walk there, really nothing to really garner from that perspective. We are excited everything worked well and we are able to get the serialized coupon out to all of our members and track the data.
Now, our next step is to really start to be able to use our BI tool and start to dig into that data, which is something we hope to be able to have in place by the end of this fiscal year. And I think 2017 will be a learning year on how do we start to really leverage that data that we have from our customers and be able to see we can motivate them into the store more frequent than we do currently today. But obviously, as you guys know, we have a pretty loyal Ollie’s Army customer database, who are very responsive to our ads and our promotions. So, we are definitely conservative on how much we think we’ll be able to lever out of the database, but we do believe we are going to be able to speak to them much more intelligently and much more timely on items that they do purchase. So, we’ll wait and see how it happens in 2017, but we are not going to really bake anything in from the standpoint of how much we’ll be able to get out of it.
Thank you. Our next question comes from the line of Dan Binder from Jefferies. Your question, please?
Hi. This is John Gugliuzza on for Dan. Congratulations on another good quarter, guys. Just a question on the traffic and ticket. I know you said they were both up, but could you give a little bit of color as to whether it was more of the traffic or the ticket driving the comp?
Sure. This is John, again. With regards to the overall comp, we had 1.8% comp for the quarter, about 70% of that increase was related on the transaction side and about 30% was on the average ticket size.
Okay. And then in terms of the category performance, you called out a number of the positive categories. I was just hoping to give a little bit of color on some of the categories that were flat or negative, and some color that performance.
Yes. The least successful categories over the quarter were books and stationary, hardware and furniture, and John they were all deal related. So, this is the business we are in. The categories that we did the best in were health and beauty aid, electronic accessories, seasonal pets and automotive, and once again deal related. So, we felt good -- we felt good where we were.
Okay. And then just last one on specific items. If you could just give an update on the coffee pods that’s still comping the comp? And is there any update on the competitive offerings or other developments that can have a meaningful impact on the coffee pod sales going forward?
Yes. We feel really good about the coffee. Again, we’re trying to wean everybody off of it, but we understand how important it is. And we comp the comps. So, I feel great about the coffee. The competitive landscape is changing a little bit but I will tell you that we have procured, we’ve a premium coffee and we promoted as such. The people will like the way it tastes; the people like the price that we have. And we also do have, John, lower price coffee than our main driver, our main brand that we have. So, if somebody wants the lower priced coffee that is available out there, we have plenty of it, and I believe ours is even better than that. So, we feel really good about it, we’re doing just fine.
Thank you. [Operator Instructions] Our next question comes from the line of David Mann from Johnson Rice. Your question please.
Going back to the earlier question about the margin gains you’re seeing, if you’re contemplating giving some of the lower cost stack in price, would you expect that to be a driver of better comp or do you feel like that’s kind of necessary to get to the lower single-digit comp in your algorithm?
David, this is John. That’s a great question. I would tell you that we just believe in giving the customer the best value we possibly can. We believe that we’ve always been able to deliver them a value and want to be consistent in that message that we send to them. So, if we can give them a better price to continue to build loyalty with that customer, we believe that’s the right thing to do. We do believe that delivering a 1% to 2% comp over the last 20 years is a consistent message we’ve been able to send to the consumer with the value proposition we gave them and we believe that that’s right thing to do on a long-term basis. And that’s kind of what we’re going to continue to strive to do.
And then, in terms of the call-out of seasonal sales in Q3, can you just elaborate a little more on the early holiday seasonal sales, is that going better than you expected in terms of what you saw into Black Friday thus far?
Well, Halloween wasn’t early, Halloween consistent and we had…
I’m sorry, I thought you talked about Christmas, early Christmas…
Yes, there were some Christmas items in there, but the big driver was the Halloween, and it’s in the same category, David. And we performed really, really well with a very nice deal on Halloween products. And I feel really good about where we are Q4, even within the seasonal sales where we’re at right now.
Thanks for clarifying that. And then, in terms of the Florida stores, can you just elaborate a little more on perhaps any of the metrics you’re seeing down there, are you seeing better revenues or is it a little bit more mixed in terms of differentials between some of the stores you’re opening down there?
Obviously, we have seven stores in the state of Florida. It’s very, very early for these stores to be able to determine exactly everything, but the early indications would be that these stores are performing right in line or slightly ahead of our expectations. And one thing I would say is that the seven of the stores appear to all be performing pretty consistent with the newness that we have in the state.
One last question, the books category, books and stationery, that’s been pretty strong for you for several quarters there. I know you’re talking about some of that might be deal-related. Is it more related to the adult coloring books sort of slowing down in trend that another retail called that yesterday or is it more generic to deal flow that you’re seeing?
No, I think it was two-fold. Certainly, we benefited from coloring book sales, adult coloring book sales last year, and we’re still selling them this year, not to the same extent. But, this isn’t our first rodeo, we’re through this all the time, it’s no different than loom bands a couple of years ago and silly bands or whatever any of the kids crazes. But in particular, it was also a stationery deal that we had last year very, very big buyout that might have been a bankruptcy data. And so, that would have been the explanations for the books and stationery category.
Great. Looking forward to the next rodeo this holiday. Good luck.
Thank you. Our next question comes from the line of Edward Kelly with Credit Suisse. Your question, please?
Hi, guys. Good afternoon. Hey, Mark, can I just start with one follow-up on coffee? When you said the competitive landscape is changing there, what did you mean by that?
Well, I think that you see some -- you’ll see some of the retailers out there with the prices below $0.30 for K-Cup. And probably two years ago, you didn’t see that, but now you see that. And we certainly have a lower price coffee in our stores as well. So, I think you’re seeing a little bit more as more and more makers and vendors are getting into the coffee pod business, the K-Cup business.
The price cap that you’re used to getting on an individual [ph] product, is that still like a level that you’re happy with?
Yes, because our product is premium. And we also with it being premium and we’ve been selling it for such a long period of time, I think we’ve got the people that are coming back in, they’re buying the coffee, they like what it -- there is just an incredible -- it’s a phenomenon I never had experience. But there is such a loyalty to coffee that is totally unexplainable. Look, I drink one cup a day. But people really, really, when get something that they like and they like the taste of it, they’re very, very loyal to the brand.
Are there other products that could be out there for you at some point that could have the impact from a traffic standpoint, like a consistent traffic standpoint, the coffee’s had? Are you thinking about this all differently, because of what coffee did?
Well, I am willing to listen, if you have any ideas. And look, we’ve been able to get involved a little bit more over the last year in the HBA business. Now, I don’t want to start telling you that’s going to have the same impact that other phenomenon did on these. But it is a growing business for us; we’re very excited; we’ve got the relationships; we’ve got great manufacturers that are supporting us and we’re providing a service as well to them. But, we look every day, this is what we do, all day long any time, there is a change in the category or disruption. And if you have any ideas, we’ll attack, we’ll go after.
Thank you. Our next question comes from the line of Michael Lehrhoff from RBC Capital Markets. Your question, please?
Hi, guys. Thanks for taking my question. I was wondering if you could talk at all about the Wall Street Journal advertisement you had over the quarter, and what kind of effect that had on deal flow and maybe the broader disruption in shipping and if you saw anything around that?
Yes. I think that certainly that garnered a lot of attention, I think it did primarily because we are now a publicly traded Company. And many of -- many analysts were calling to find out. That’s no different than what we’ve been doing for 34 years. Maybe it’s higher profile now. And anytime that there is a disruption, we try to capitalize on it, we try to make our services available. And it was absolutely, absolutely wonderful way to let the business community know how we make a living. We receive calls from people, not totally unrelated from the bankruptcy and just saying hey, I’ve got product, I saw your ad, do you guys buy this, do you buy that. So, it’s no different. I’ve advertised in the Wall Street Journal many, many years ago, although the ad wasn’t as big, and we were able to get some offers. I think we’ve closed a couple of little deals, but we have more conversations going on. But it’s no different than us running it in the home center news or the sporting goods industry paper, it just happened to be the Wall Street Journal.
[Operator Instructions] Our next question comes from the line of Patrick McKeever from MKM Partners. Your question please.
Okay. Thank you very much. I’m just wondering on tax refund season, I guess it looks like tax refunds are going to be delayed until February 15th this year. And I’m just wondering if that’s important to your business toward the end of the fourth quarter and then the beginning of the first quarter?
Patrick, this is John. With regards to the tax refunds, we as an organization have really never focused real heavily on the timing of tax refunds for our consumer base. It’s not something that we focus on real heavily, and we don’t believe it’s that relevant for obviously the last month of our fiscal fourth quarter or the first month of Q1. It’s just something that we’ve never really seen a big differentiation on the timing of when tax refunds come out to our customer base.
Okay. And then, just on your holiday advertising program, hearing a lot of great radio ads, very catchy. Have you changed anything in terms of the marketing spend this year? I mean, I’m assuming you have because you’ve grown, but even as a percent of sales and have you changed the mix of media?
No, there has been absolutely no change. It’s worked very, very well for us for many, many years and continues to do well. But I think your call-out of the electronic media is -- we absolutely utilize electronic media, radio and TV, and fish when the fish are biting and that would be in the fourth quarter. So, we do focus on that. That might be why -- not why, that’s when we run our electronic media. But yes, there has been no change as a percent to sales. We are right on spot with where we want it to be and we are very, very pleased with the response rate that the consumer is having for us; they are really loving the bargains that we are selling.
I would think that with so many other retailers moving more toward social media and digital that your ads would stand out even more, because there just aren’t that many retail ads right now out there. I mean there’s certainly plenty on TV, but not that many on radio. But, anyways, that would be my thought there. Last question, just on some of the issues that have affected Walmart and some other retailers, food price deflation and the cuts in food stamp system. I guess the latter probably wouldn’t have much of an impact because I don’t know that’s -- I think there were -- a lot of those were outside of some of the states that you operate in. But nonetheless, just wondering if those two things had any impact on the business or there are things that you’re thinking about?
Well, the food stamps, we don’t take food stamps. I think that’s within the states, there’s certain requirements of whether or not you have freezers and you sell staple items. Our idea of food by the way, as you’re well aware, is pop tarts and potato chips; so, we’re not selling anything perishable. As far as any deflationary, we don’t set the price, we react to the price. So, certainly, if prices are coming down and something used to sell for a $1.29 and now it sells for $0.99, we’re pricing off of whatever the market price is, we hope to be able to sell it at less.
Got it. Yes, I guess on food stamps, so I was thinking more of a broad impact on a portion of your customer base understanding that you have a broader demographic than some of the companies that have experienced issues there. That’s all.
Thank you. And this does conclude the question-and-answer session of today’s program. I’d like to hand the program back to Mark Butler for any further remarks.
Thank you, operator, and thank you to everyone for listening to our third quarter earnings call. We believe we’re well-positioned heading into the holiday season. We’re very excited, and we look forward to speaking to you again on our fourth quarter call in late March. Thank you very much and happy holidays.
Thank you, ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.
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