| ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 Ollie’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 the Securities and Exchange Commission, or SEC, on March 24, 2023 (“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 to Ollie’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 to January 31st of the following year. References to “2024” refer to the 52-week period of February 4, 2024 to February 1, 2025. References to “2023” refer to the 53-week period of January 29, 2023 to February 3, 2024. References to “2022” refer to the 52-week period of January 30, 2022 to January 28, 2023. References to the “first quarter of fiscal 2023” and the “first quarter of fiscal 2022” refer to the thirteen weeks of January 29, 2023 to April 29, 2023 and January 30, 2022 to April 30, 2022, 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 the U.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, capital market conditions, 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, supply chain challenges, legislation, national trade policy, and the following: our failure to adequately procure and manage our inventory, anticipate consumer demand, or achieve favorable product margins; changes in consumer confidence and spending; risks associated with our status as a “brick and mortar” only retailer; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; fluctuations in comparable store sales and results of operations, including on a quarterly basis; factors such as inflation, cost increases and energy prices; the risks associated with doing business with international manufacturers and suppliers including, but not limited to, potential increases in tariffs on imported goods; our inability to operate our stores due to civil unrest and related protests or disturbances; our failure to properly hire and to retain key personnel and other qualified personnel; changes in market levels of wages; risks associated with cybersecurity events, and the timely and effective deployment, protection, and defense of computer networks and other electronic systems, including e-mail; our inability to obtain favorable lease terms for our properties; the failure to timely acquire, develop, open and operate, or the loss of, disruption or interruption in the operations of, any of our centralized distribution centers; 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 natural disasters, whether or not caused by climate change; outbreak of viruses, global health epidemics, pandemics, or widespread illness, including the continued impact of COVID-19 and continuing or renewed regulatory responses thereto; 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 the SEC, 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 and SEC filings.
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, bed and bath, food, floor coverings, health and beauty aids,
books and stationery, toys, and electronics. 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.
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 476 stores located in 29 states as of April 29, 2023.
Our stores are supported by three distribution centers, one each in York, PA, Commerce, GA and Lancaster, TX. We are in the process of expanding our York, PA distribution center, which will provide an additional 201,000 square feet of distribution capacity and is expected to be completed in the first half of 2023. In the first quarter of fiscal 2023, the Company acquired land in Princeton, IL, for the construction of its fourth distribution center. The Company expects to occupy the distribution center in the second quarter of fiscal 2024. With the expansion of our York, PA distribution center and the addition of our fourth distribution center, we believe our distribution capabilities will support over 700 stores.
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:
increasing our offerings of great bargains; and
leveraging and expanding Ollie’s Army.
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 $4.0 million in their first full year of operations.
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, rising interest rates, 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.
Net Sales
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, rising interest rates, 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.
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 remodel and 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 remodel costs primarily consist of payroll expenses, travel expenses, and store setup costs expensed as they are incurred. 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 or benefit. 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 U.S. generally accepted accounting principles (“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 gains on insurance settlements. 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 9 new stores and closed 1 store in the first quarter of fiscal 2023 and opened 9 new stores and closed one store in connection with a relocation in the first quarter of fiscal 2022. In connection with these store openings and closings, we incurred expenses of $2.1 million and $2.7 million in the respective periods.
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.
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 first quarter of fiscal 2023 and the first quarter of fiscal 2022 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 | |
| | | April 29, 2023 | | | April 30, 2022 | |
| | | ( dollars in thousands) | |
Condensed consolidated statements of income data: | | | | | | |
| Net sales | | $ | 459,154 | | | $ | 406,666 | |
| Cost of sales | | | 280,583 | | | | 265,341 | |
| Gross profit | | | 178,571 | | | | 141,325 | |
| Selling, general and administrative expenses | | | 130,268 | | | | 116,273 | |
| Depreciation and amortization expenses | | | 6,483 | | | | 5,247 | |
| Pre-opening expenses | | | 3,281 | | | | 2,660 | |
| Operating income | | | 38,539 | | | | 17,145 | |
| Interest (income) expense, net | | | (2,675 | ) | | | 109 | |
| Income before income taxes | | | 41,214 | | | | 17,036 | |
| Income tax expense | | | 10,234 | | | | 4,513 | |
| Net income | | $ | 30,980 | | | $ | 12,523 | |
Percentage of net sales (1): | | | | | | | | |
| Net sales | | | 100.0 | % | | | 100.0 | % |
| Cost of sales | | | 61.1 | | | | 65.2 | |
| Gross profit | | | 38.9 | | | | 34.8 | |
| Selling, general and administrative expenses | | | 28.4 | | | | 28.6 | |
| Depreciation and amortization expenses | | | 1.4 | | | | 1.3 | |
| Pre-opening expenses | | | 0.7 | | | | 0.7 | |
| Operating income | | | 8.4 | | | | 4.2 | |
| Interest (income) expense, net | | | (0.6 | ) | | | — | |
| Income before income taxes | | | 9.0 | | | | 4.2 | |
| Income tax expense | | | 2.2 | | | | 1.1 | |
| Net income | | | 6.7 | % | | | 3.1 | % |
| Select operating data: | | | | | | | | |
| Number of new stores | | | 9 | | | | 9 | |
| Number of closed stores | | | (1 | ) | | | (1 | ) |
| Number of stores open at end of period | | | 476 | | | | 439 | |
Average net sales per store (2) | | $ | 970 | | | $ | 935 | |
| Comparable stores sales change | | | 4.5 | % | | | (17.3 | )% |
| (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. |
The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented:
| | | Thirteen weeks ended | |
| | | April 29, 2023 | | | April 30, 2022 | |
| | | (in thousands) | |
| Net income | | $ | 30,980 | | | $ | 12,523 | |
| Interest (income) expense, net | | | (2,675 | ) | | | 109 | |
Depreciation and amortization expenses (1) | | | 8,074 | | | | 6,708 | |
| Income tax expense | | | 10,234 | | | | 4,513 | |
| EBITDA | | | 46,613 | | | | 23,853 | |
| Non-cash stock-based compensation expense | | | 2,863 | | | | 2,388 | |
| Adjusted EBITDA | | $ | 49,476 | | | $ | 26,241 | |
| (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 2023 Compared to First Quarter of Fiscal 2022
Net Sales
Net sales increased to $459.2 million in the first quarter of fiscal 2023 from $406.7 million in the first quarter of fiscal 2022, an increase of $52.5 million, or 12.9%. The increase was the result of a comparable store sales increase of $18.0 million and an increase in non-comparable store sales of $34.5 million. The increase in non-comparable store sales was driven by new store unit growth.
Comparable store sales increased 4.5% in the first quarter of fiscal 2023 compared with a 17.3% decrease in the first quarter of fiscal 2022. The increase in comparable store sales consisted of an increase in the number of transactions. Increases in food, candy, health and beauty aids, lawn & garden, and flooring departments were offset by declines in certain home-related categories.
Gross Profit and Gross Margin
Gross profit increased to $178.6 million in the first quarter of fiscal 2023 from $141.3 million in the first quarter of fiscal 2022. Gross margin increased 410 basis points to 38.9% in the first quarter of fiscal 2023 from 34.8% in the first quarter of fiscal 2022. The increase in gross margin in the first quarter of fiscal 2023 is primarily due to favorable supply chain costs, partially offset by lower merchandise margin related to shrink and a higher mix of consumables.
Selling, General, and Administrative Expenses
SG&A increased to $130.3 million in the first quarter of fiscal 2023 from $116.3 million in the first quarter of fiscal 2022, an increase of $14.0 million, or 12.0%, primarily driven by higher selling expenses related to new store openings and incentive compensation. As a percentage of net sales, SG&A decreased to 28.4% in the first quarter of fiscal 2023 compared to 28.6% the first quarter of fiscal 2022 primarily the result of leverage of fixed expenses on the increase in comparable store sales partially offset by higher incentive compensation.
Pre-Opening Expenses
Pre-opening expenses for new stores increased to $3.3 million in the first quarter of fiscal 2023 from $2.7 million in the first quarter of fiscal 2022 primarily driven by incremental investments in our store remodel program, partially offset by timing of new stores. We opened 9 new stores in the first quarter of fiscal 2023 and fiscal 2022, respectively. As a percentage of net sales, pre-opening expenses remained flat at 0.7% in the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.
Interest (Income) Expense, Net
Net interest income was $2.7 million in the first quarter of fiscal 2023 compared with net interest expense of $0.1 million in the first quarter of fiscal 2022. The increase in interest income in the first quarter of fiscal 2023 is primarily due to favorable interest rates and higher average cash and cash equivalent and short-term investments balances compared to the first quarter of fiscal 2022.
Income Tax Expense
Income tax expense increased to $10.2 million in the first quarter of fiscal 2023 compared to $4.5 million in the first quarter of fiscal 2022. The effective tax rates for the first quarters of fiscal 2023 and fiscal 2022 were 24.8% and 26.5%, respectively. The decrease in the effective tax rate in the quarter was primarily due to an increase in excess tax benefits related to stock-based compensation. Discrete tax benefits totaled $0.2 million in the first quarter for fiscal 2023 compared to discrete tax expense of $0.2 million in the first quarter of fiscal 2022.
Net Income
As a result of the foregoing, net income increased to $31.0 million in the first quarter of fiscal 2023 from $12.5 million in the first quarter of fiscal 2022, an increase of $18.5 million or 147.4%.
Adjusted EBITDA
Adjusted EBITDA increased to $49.5 million in the first quarter of fiscal 2023 from $26.2 million in the first quarter of fiscal 2022, an increase of $23.3 million, or 88.5%.
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are net cash flows provided by operating activities and available borrowings under our $100.0 million Revolving Credit Facility. Our primary cash needs are for capital expenditures and working capital. As of April 29, 2023, we had $91.6 million available to borrow under our Revolving Credit Facility and $275.5 million of cash and cash equivalents and short-term investments on hand. For further information regarding our Revolving Credit Facility, see Note 7 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 $19.0 million and $9.7 million for capital expenditures during the first quarters of fiscal 2023 and fiscal 2022, respectively. We expect to fund capital expenditures from cash on hand generated from operations. We opened 9 new stores and closed one store during the first quarter of fiscal 2023 and we expect to open approximately 45 stores during fiscal 2023. Included in our plans is the construction of our fourth distribution center, the completion of the expansion of our York, PA distribution center, as well as store-level initiatives at our existing stores, and general corporate capital expenditures, including information technology. Once complete, the 201,000 square foot expansion of our York, PA distribution center, will provide us the capacity for an additional 50 stores. We have experienced, and may continue to experience, delays in construction and permitting of new stores and other projects.
Our primary working capital requirements are for the purchase of merchandise inventories, payroll, store rent associated with our operating leases, 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.
Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash flows from operations.
A financial instrument which potentially subjects the Company to a concentration of credit risk is cash. Ollie’s currently maintains its day-to-day operating cash balances with major financial institutions. The Company’s operating cash balances are in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. From time to time, Ollie’s invests temporary excess cash in overnight investments with expected minimal volatility, such as money market funds. Although the Company maintains balances which exceed the FDIC insured limit, it has not experienced any losses related to these balances.
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.
Share Repurchase Program
On March 26, 2019, the Board of Directors of the Company authorized the repurchase of up to $100.0 million of shares of our common stock. This initial tranche expired on March 26, 2021. The Board authorized the repurchase of another $100.0 million of our common stock on December 15, 2020 and a $100.0 million increase on March 16, 2021, resulting in $200.0 million approved for share repurchases through January 13, 2023. On November 30, 2021, the Board authorized an additional $200.0 million to repurchase stock pursuant to the Company’s share repurchase program, expiring on December 15, 2023. 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 and is subject to suspension or termination by our Board of Directors at any time.
During the first quarter of fiscal 2023, we repurchased 215,522 shares of our common stock for $12.3 million, inclusive of transaction costs, pursuant to our share repurchase program. During the first quarter of fiscal 2022, no share repurchases occurred. These expenditures were funded by cash generated from operations. As of April 29, 2023, we had $125.9 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.
Summary of Cash Flows
A summary of our cash flows from operating, investing, and financing activities is presented in the following table:
| | | Thirteen weeks ended | |
| | | April 29, 2023 | | | April 30, 2022 | |
| | | (in thousands) | |
| Net cash provided by (used in) operating activities | | $ | 35,872 | | | $ | (31,516 | ) |
| Net cash used in investing activities | | | (99,311 | ) | | | (9,617 | ) |
| Net cash used in financing activities | | | (12,198 | ) | | | (381 | ) |
| Net decrease in cash and cash equivalents | | $ | (75,637 | ) | | $ | (41,514 | ) |
Cash Provided by Operating Activities
Net cash provided by operating activities in the first quarter of fiscal 2023 was $35.8 million as compared to net cash used in operating activities of $31.5 million in the first quarter of fiscal 2022. The increase in net cash provided by operating activities in the first quarter of fiscal 2023 was primarily due to decreased working capital needs, largely due to a decrease in capitalized costs in inventory, as well as timing of inventory receipts and payments and higher net income year over year.
Cash Used in Investing Activities
Net cash used in investing activities in the first quarters of fiscal 2023 and fiscal 2022 was $99.3 million and $9.6 million, respectively. The increase in cash used in investing activities is primarily due to purchases of short-term investments of $85.4 million, in addition to an increase in capital expenditures in the current year, partially offset by maturities of short-term investments of $5.0 million.
Cash Used in Financing Activities
Net cash used in financing activities in the first quarters of fiscal 2023 and fiscal 2022 was $12.2 million and $0.4 million, respectively. The increase in cash used in financing activities is primarily due to shares repurchased in the first quarter of fiscal 2023 of $12.3 million compared to no repurchases in the first quarter of fiscal 2022.
Contractual Obligations
We enter into long-term contractual obligations and commitments in the normal course of business, primarily operating leases. Except as set forth in Note 4 of the accompanying unaudited condensed consolidated financial statements, there have been no material changes to our contractual obligations as disclosed in our Annual Report, other than those which occur in the ordinary course of business.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. There have been no significant changes in the significant accounting policies and estimates.
Recently Issued Accounting Pronouncements
Not applicable.
| ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
We are subject to interest rate risk in connection with borrowings under our Revolving Credit Facility, which bears interest at variable rates. As of April 29, 2023, we had no outstanding variable rate debt.
As of April 29, 2023, there were no material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our Annual Report.
Impact of Inflation
Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot be assured that our results of operations and financial condition will not be materially impacted by inflation in the future.
| ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is: (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.
Changes in Internal Control over Financial Reporting
There were no changes to our internal control over financial reporting during the first quarter of fiscal 2023 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
From time to time we may be involved in claims and legal actions that arise in the ordinary course of our business. We cannot predict the outcome of any litigation or suit to which we are a party. However, we do not believe that an unfavorable decision of any of the current claims or legal actions against us, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.
See Item 1A in our Annual Report for a detailed description of risk factors affecting the Company. There have been no material changes from the risk factors previously disclosed in that filing.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Information on Share Repurchases
Information regarding shares of common stock the Company repurchased during the thirteen weeks ended April 29, 2023 is as follows:
| Period | | Total number of shares repurchased (1) | | | Average price paid per share (2) | | | Total number of shares purchased as part of publicly announced plans or programs (3) | | | Approximate dollar value of shares that may yet be purchased under the plans or programs (3) | |
| January 29, 2023 through February 25, 2023 | | | 9,321 | | | $ | 53.89 | | | | 9,321 | | | $ | 137,694,721 | |
| February 26, 2023 through April 1, 2023 | | | 98,895 | | | $ | 54.49 | | | | 98,895 | | | $ | 132,257,435 | |
| April 2, 2023 through April 29, 2023 | | | 107,306 | | | $ | 59.18 | | | | 107,306 | | | $ | 125,916,069 | |
| Total | | | 215,522 | | | | | | | | 215,522 | | | | | |
| (1) | Consists of shares repurchased under the publicly announced share repurchase program. |
| (2) | Includes commissions for the shares repurchased under the share repurchase program. |
| (3) | On December 15, 2020, the Board of Directors authorized the repurchase of up to $100.00 million of shares of the Company’s common stock. On March 16, 2021, the Board of Directors of the Company authorized an increase of $100.0 million in the Company’s share repurchase program resulting in $200.0 million approved for share repurchases through January 13, 2023. On November 30, 2021, the Board authorized an additional $200.0 million to repurchase stock pursuant to the Company’s share repurchase program, expiring on December 15, 2023. Shares under both authorizations may be purchased from time to time in open market transactions (including blocks), privately negotiated transactions, accelerated share repurchase programs or other derivative transactions, issuer self-tender offers or any combination of the foregoing. The timing of repurchases and the actual amount purchased will depend on a variety of factors, including the market price of the Company’s shares, general market, economic and business conditions, and other corporate considerations. In addition, the authorizations are subject to extension or earlier termination by the Board of Directors at any time. As of April 29, 2023, the Company had $125.9 million remaining under its share repurchase program. For further discussion on the share repurchase program, see “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources, Share Repurchase Program.” |
Exhibit No. | | Description of Exhibits |
| | |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
| | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
**101.INS | | Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
| | |
**101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
| | |
**101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
**101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
**101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
**101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
**104 | | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
| ** | Submitted electronically with this Report. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| OLLIE’S BARGAIN OUTLET HOLDINGS, INC. |
| | |
Date: June 7, 2023 | | /s/
| Robert Helm | |
| | | |
| | | Robert Helm |
| | | Senior Vice President and Chief Financial Officer |
| | | (Principal Financial and Accounting Officer) |
29