Ollie's Bargain Outlet Holdings Inc (OLLI) 2015 Q4 法說會逐字稿

Good afternoon and welcome to the Ollie's Bargain Outlet conference call to discuss fiscal 2015 fourth-quarter and full-year financial results.

(Operator Instructions)

Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization from Ollie's. 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; 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. Hello everyone. A press release covering the Company's 2015 fourth-quarter and full-year 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 projected on today's call. Any such items, including targeted results for FY16 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 them for any new information or future events.

Factors that might affect future results are discussed in our filings with the SEC and we encourage you to review these filings, including the Company's quarterly reports on Form 10-Q and its prospectuses related to the Company's IPO and secondary offering 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 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 GAAP financial measures are included in our earnings release. I will now turn the call over to Mark.

Thanks, Jay, and good afternoon, everyone. As we reported our preliminary results in an 8-K filing on February 16, we had a very strong fourth quarter and full year. Once again, the strength was broad-based and across the entire business. Sales, margins, new store performance, expense control, deal flow and Ollie's Army, you name it, it was all good in the quarter and the full year.

On the sales side, comps increased 5% versus a 9% increase in the fourth quarter last year. The majority of our 21 departments delivered a comp increase of mid-single digits or better. Some of the best performing areas were books and stationary, electronics and accessories, food and candy, hardware, toys, bed/bath, and pets. Coffee continued to perform well and comped positive to last year.

We also saw very consistent performance across the store base. This is the beauty of our model, regardless of the location, the vintage or co-tenancy, our stores generate consistent financial returns and we have never had a store lose money in our 33-year history. On the margin side, operating margin increased 170 points to 13.7%; higher merchandise margins, lower distribution cost and tight expense control all benefited margins.

New stores continued to perform in line or above our expectations. We opened three new stores in the quarter and 27 net new stores for the full year. We entered the state of Connecticut in 2015 and remain committed to opening stores in contiguous states. The deal flow was very strong in the quarter and we continued to gain better access to merchandise, expand our vendor base and build more direct relationships.

Ollie's Army membership levels continued to grow well above sales and members continued to spend significantly more than non-members. Ollie's Army Night was very strong in the fourth quarter and this was a marquee event for us and the Army. 2015 was a tremendous year for Ollie's and I want to congratulate the entire team for their dedication and execution.

In 2015, we delivered record sales and profits, took the Company public, opened our 200th store, entered our 17th state, completed Phase 1 of our loyalty management system and continued to build our executive leadership team. Retail is detail and it requires great people and execution every day to gain share and to grow the business.

This is Ollie's 33rd year in business and many of our team members have been with the business 10, 20 and even 30 years. It's the experience of the team, 100% commitment to the closeout business and disciplined operating structure that makes Ollie's unique and separates us from every other retailer in America.

The business had a lot of momentum in 2015 and we have seen that continue in early 2016. As we have discussed over the past few quarters, we're seeing better access to merchandise for a variety of reasons. This is allowing our buyers to be more selective and offer our customers even better bargains on great-quality, branded merchandise each and every time they walk into one of our stores.

Real brands, real bargains. This is what's making our stores more of a destination for our existing customers and what we believe what we're doing is attracting each and every day. We are the birthplace of bargains in the closeout industry and we continue to develop direct relationships with consumer products companies and source more products directly from major manufacturers.

In 2016, we expect to attend nearly every trade show that there is in America, including the National Hardware Show, The Houseware Show, The Global Pet Show, Toy Fairs in New York and even Hong Kong; you name it, our buyers will be there making deals and building relationships.

In 2016, we look to implement Phase 2 of our customer loyalty management system. This should give us the ability to begin testing customized communication with Ollie's Army members late in the year. We think this could be an effective, a very effective way to interact with our best customers and let them know when particular products are in our stores.

On the new storefront, we plan to open 28 to 32 new stores this year, with our first stores in the states of Florida and Mississippi. We believe both new states should be great markets for us and we also see lots of opportunities in existing markets across our 17 states.

In summary, we feel very good about the outlook and the trends across our business right now, and we're focused on executing the strategy we laid out during our IPO process, which includes opening new stores in contiguous and existing states, strengthening our relationships with vendors, gaining better access to product, leveraging our second distribution center, investing back into the business, paying down debt and generating strong returns for our shareholders.

With that, I will turn the call over to John and he will take you through the financial results in more detail.

Thanks, Mark, and good afternoon, everyone. As Mark indicated, the business continued to perform well in the fourth quarter and we are very pleased with our results. Net sales increased 21.3% to $243.4 million; comparable store sales increased 5% versus a 9% increase in the fourth quarter of last year. The increase in comparable store sales was driven by an increase in the number of transactions and basket.

We opened three new stores in the quarter, ending with 203 stores in 17 states versus 176 stores in 16 states last year, for an increase of 15.3%. Our new stores continue to perform in line or above our expectations and we remain pleased with the new store productivity.

Gross profit increased 24.6% to $98.8 million and gross margin increased 110 basis points to 40.6%. The increase in gross margin was driven by higher merchandise margins and reduced transportation and distribution cost as a percent of net sales.

SG&A expenses increased 18.5% to $62.5 million in the quarter. The majority of the increase, or approximately $8.5 million, was related to higher selling expenses from the 27 net new stores opened during the fiscal year and the increased sales volumes.

The remaining increase in SG&A was primarily related to investment in our store support center to support the continued growth in the business and public company expenses. As a percentage of net sales, SG&A decreased 60 basis points to 25.7% in the fourth quarter. Operating income for the fourth quarter increased 38.1% to $33.3 million.

Our effective tax rate declined to 37.8% from 38.4% in the fourth quarter of last year, as a result of employment-based tax credits and a slight reduction in the projected state tax rates. Net income increased 33.8% to $16.1 million, or $0.26 per diluted share. Excluding the loss on extinguishment of debt, adjusted net income increased 56.4% to $18.8 million, or $0.31 per diluted share.

EBITDA increased 35.6% to $35.7 million, and adjusted EBITDA, which excludes non-cash-based stock compensation expense, pre-opening expenses, and non-cash purchase accounting expenses increased 37% to $38.2 million.

As of January 30, 2016, we had $30.3 million in cash and no outstanding borrowings under our $100 million revolving credit facility. During the quarter, we paid down approximately $14 million of term loan debt and ended fiscal 2015 with total debt $200.1 million versus $324.1 million at the end of fiscal 2014.

Capital expenditures were $3.3 million in the fourth quarter versus $2.0 million a year ago for the same period, and $14.2 million in fiscal 2015 versus $14.1 million in fiscal 2014. For FY15, net sales increased 19.5% to $762.4 million. Comparable store sales increased 6% versus a 4% increase last year and the number of stores increased 15.3%. Gross margin was flat at 39.7% and operating margins increased 60 basis points to 10.4%.

Net income increased 33.2% to $35.8 million, or $0.64 per diluted share and adjusted net income increased 47.1% to $40.2 million, or $0.72 per diluted share. EBITDA increased 24.2% to $88.9 million, and adjusted EBITDA increased 25% to $100.4 million.

Now let me conclude with some commentary on our outlook for fiscal 2016. As you are aware, we are an extreme value retailer of brand name merchandise and the majority of our merchandise comes from opportunistic closeout buys. The closeout nature of our business can lead to some fluctuations in our business and make it difficult to predict comparable store sales.

With that said, however, we are seeing better access to merchandise, which is allowing our merchants to be more selective and opportunistic with their buys. We have historically planned the growth in the business around three primary metrics. The first is a mid-teens percentage increase in new store growth; the second is mid-teen percentage increase in annual sales growth; and the third is annual net income growth of approximately 20%.

Better access to merchandise and strength in the food category has boosted comparable store sales over the past two years and been a nice tailwind to our business. While our business continues to perform well, we do face very challenging comparisons for the strong comps -- from the strong comps in both 2014 and 2015. As a result, we believe it is prudent to take a conservative approach to planning the business for fiscal 2016.

We currently estimate the following results for fiscal 2016. Total net sales of $865 million to $875 million; comparable store sales growth of 1.5% to 2.5%; the opening of 28 to 32 new stores and no planned closures ; operating income between $90 million and $93 million; net income between $51 million and $52 million.

Net income per diluted share between $0.82 and $0.84 on a diluted average share outstanding base of approximately 62 million. Excluding expenses related to our secondary offering filed on February 18, of 2016, we expect net income of $51.4 million to $52.4 million and adjusted net income per diluted share of $0.83 to $0.85 per share; capital expenditures of $14 million to $15 million.

A few other items that may be helpful. We estimate annual interest expense between $8 million to $8.3 million ; depreciation and amortization expense between $10.5 million and $10.8 million; and an effective tax rate of 38.5%. On a two-year stacked basis, we face our least challenging sales comparison in the first quarter of this year.

This, combined with a strong start to the spring selling season, and a continued momentum in the business, we likely -- we will likely generate higher comparable store sales in the first quarter than the rest of the year. We expect our SG&A ratio to be relatively flat on a full-year basis.

We expect our expense ratio to increase on a year-over-year basis in the first half, primarily from investments that our store support center and public company expenses. 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)

Brad Thomas, Key Capital Markets.

Yes, hi. Thank you guys and congratulations on a great quarter and year. I wanted to first ask about the outlook for same-store sales issue, as you just commented on, John. How are you thinking about comps as we move into the back half, as you get against these more difficult comparisons? Is that something you think you can comp against? Or was there perhaps some nature to the buys that you've had in the last couple of quarters that might make more for more difficult comparisons?

Sure, Brad. This is John. With regards to the overall sales and the way we're looking at it, obviously, we're not looking to give quarterly guidance at this point but we are wanting to add a little bit of color to our first quarter sales trends. We believe our first quarter is going to be somewhere in the mid-single digits on the positive front and we are really guiding to a 1% to 2% comp for the next three quarters, for the remainder part of the year.

Perfect. Thank you. And then if I could ask a follow-up about Ollie's Army, as you look ahead here to Phase 2 and rolling out the custom communication, could you give a sense of maybe how broad those tests could be? What, if any, benefit is baked into your guidance for this year and how quickly might that be able to become a meaningful driver for you? Thank you.

Sure. Brad, I'll take part of the question and then Mark will probably finish it. But with regards to how much of the benefit is baked into our overall guidance, our numbers for 2016, we've really given very, very little impact to our sales guidance for the year.

We basically expect to be able to crawl and start the implementation of this program, sometime in 2016. So we've not expected -- we've not baked in any benefit at this point in time, with regards to overall sales numbers as a result of the Phase 2 implementation of the loyalty management system?

As far as the other thing, Brad, with Ollie's Army is that Ollie's Army now is 6.4 million members strong. It continues to grow; certainly that's a byproduct of the store growth. But we have been able to, even in our existing markets, continue to sign up people. They are responding. We knew -- we know they are responding bigger and better than ever and certainly more than non-Ollie's Army member customer.

Great. Thank you very much.

Thanks Brad.

Thanks Brad.

Dan Binder, Jefferies.

Hi, it's Dan Binder. Thanks and congrats on a good quarter. I was just hoping maybe you could talk a little bit more about the direct relationships, the better access. I don't know if you can be more specific but in light of some news out there recently, that one of your competitors is getting into this space in a more meaningful way.

I'm just curious how you are feeling about the ability to continue getting access to product and what you expect on the direct side this year, in terms of the (multiple speakers) percentage of your business?

Dan, I'm all over this and obviously, I'm not in a position to talk about somebody else's business but I can tell you that in the closeout business, we're at the top of many, if not most major manufacturers' first call, if not all of them. And we have certainly -- after 33 years, the closeout business isn't an easy business and we've been doing this for 33 years.

And we've demonstrated to the manufacturers and continued to, especially on these new relationships, that we can take the goods and we can pay for the goods. Like I said, the closeout industry, like all businesses, it's tough. We have the expertise and the willingness to deal with the closeout industry and then most importantly, and you've been around, Dan.

You've been in our stores. You know we know how to manage the process and the deals from the beginning, the middle and then most importantly, the end. So there's a lot of things that impact our business and the closeout business, any kind -- any time there is a disruption, whether it be a major retailer getting in or a major retailer getting out of merchandise.

What I can tell you is that we have been seeing more and more access to merchandise, more and more phone calls coming in, and we're getting bigger, better, brighter and broader deals. So I'm really, really excited. I have not seen any change in the competitive landscape to date, other than, we're buying more and more than we ever have before.

And then just a follow-up question on the Ollie's Army. You made -- you commented on the size of it. I'm just curious. Are you seeing anything meaningful in terms of the behavior of the Ollie Army members that you've added over the last year, as you've opened new stores versus what you've seen historically? Are they better, worse, about the same, in terms of what they are expecting and how -- and when they are doing it?

Dan, this is John. The overall growth of the Army and then the vintage of the individuals is very, very consistent. Their -- the amount they're spending per visit and the frequency of visit is pretty much right in line with our mature or older class of stores.

So we're seeing very much a consistent response from those overall Ollie's Army members. We are seeing an increase in the overall mix in terms of how much of our overall sales are coming from Ollie's Army members versus non-Ollie's Army members and that's increasing. We've seen the amount that Ollie's Army members are spending is increasing as well over non-Ollie's Army members year over year.

Great. Thanks.

Thank you.

Thanks Dan.

Matthew Boss, JPMorgan.

Hi, congrats on a great quarter. So on the store pipeline, what's the timing of your Florida entrance this year? How big do you think that opportunity can be? And then can you just speak to the initial reception around your Connecticut launch and just the potential Northeast opportunity, as you see it over time?

Yes, in Florida, we expect to open on May 4, and that's going to be in Orlando on West Colonial Drive. We think that we will probably have six to nine stores in the state of Florida this year, one to two stores in the state of Mississippi. The Orlando store, in particular, again, the first of -- the first week of May, I was there about 10 days ago, and I'm really pumped about that site.

It's going to look like all of ours but it -- I got a real good vibe there so I think it's going to perform very, very well. Connecticut has performed at or above our expectation, doing just fine, and we're looking to expand that market as well, Matt.

Great. And then just a follow-up, what's the best way to think about the -- how do you guys think about the back and forth between expanding the top line and expanding the merchandise margins?

More so, if you're going to see an expansion of vendor relationships and the closeout pipeline is as robust as you speak to on a multi-year basis, what prevents merchandise margin expansion? How do you kind of focus on the value to the customer and the deal versus flowing some additional to the bottom line?

Sure, Matt. This is John. With regards to that and we kind of discussed through the entire IPO process, we're really focused on a 40% gross margin and we feel very -- we feel it's very important that we continue to deliver great values to our customers. And we believe that once we get back to the 40% gross margin; we're not quite there yet. We're getting back in and we're pretty close now, but we will continue to focus on 40% margins and then share, we believe that will drive additional sales with our consumer base.

Great. Best of luck.

Thank you.

Thanks Matt.

(Operator Instructions)

Edward Kelly, Credit Suisse.

Yes, hi guys. It's actually Judah on for Ed. I was just s hoping you could give us an indication of some of the categories, where the strong deals are coming now that we're entering the spring season. Is there any color you can give us there?

Yes, this is Mark. I can tell you from the fourth quarter that some of our -- as I did mention, some of our better performing categories were books and stationary, electronic accessories, food and candy. Of course, toys was strong and I think hardware was right up there.

On the bottom side, because that might and should be your next question, what were the lesser contributors? And that would have been housewares, floor coverings and definitely deal related, in particular, may be a deal which I'm obviously not going to even say what it was last year.

But I will tell you that heaters, because it was an unusually warm winter for where the majority of our stores are so we didn't do a -- sell as many heaters this year as last year. Floor covering was absolutely deal related, again, I'm not going to get into that.

In the spring, we've -- I'm very pleased with where we're at, obviously, that means that the lawn and garden and spring product, because of the change in the weather patterns, has proven favorable to us. So I'm really, really pleased where we at.

Okay, great. And then maybe just more high-level on the holiday selling season. Obviously, it was a great one for you guys but as more sales move online for holiday, can you talk a little bit about how your model is really insulated from that trend, both this year and going forward?

Yes I think it's got to do with and you've heard me speak before, I think it's got to do with the treasure hunt shopping mentality. We have a shopping experience in our brick-and-mortar situation that just is -- it's just not duplicated online and you know, when you come in looking for a particular item that you might be responding to an ad, with the vast array of the offering and name brands at drastically reduced prices that you see in our stores, you come in for one thing and you buy another.

And I think that, that's playing a strong part. It's obviously the merchandise in the store and that mold -- that, being able to add on those sales and the treasure hunt shopping mentality is just, in my mind, very, very, very difficult to duplicate online.

Got it. Okay. Thanks and congrats.

Peter Keith, Piper Jaffray.

Hi, guys, and thanks for taking the call. John, I was curious just on the gross margin strengths during the quarter, you did have a bit of an easier compare, but was there something abnormally good with regards to the merchandise margin, perhaps with some of the better buys that you're getting?

Peter, I think there -- it was mixed in terms of the overall impact, as we had kind of spoke previously, was in fourth quarter of the prior year, we had gotten hit pretty hard with freight cost, with the port disruptions and whatnot. So we were annualizing that, and we -- so we levered our and obviously bringing our DCF to speed and more online than it had been in 2014 and utilizing some of those fixed cost.

We were able to leverage our DC operating expense structure. We did see a better improvement in the merchandise margin. A part of that was related to better access to merchandise and stronger deal flow and that's going to be a little more selective to be able to get our margins up to where we want to see them at.

Okay. Helpful, thank you. And then I wanted to dig into coffee a little bit. I was wondering if you could refresh us on the number of visits that your average customer makes per year and if you've been able to then dissect that down to the number of visits per year that a coffee buyer might make and I'm curious if we're now seeing a healthy traffic benefit from that category.

Sure, Peter, I'll take a crack at it. Mark may chime in a little bit. We've never actually commented on the frequency of our overall shopper because we don't know the non-Ollie's Army member frequency of visits. We do know our Ollie's Army membership frequency has ticked up very, very slightly on an aggregate basis. But we do believe and we are seeing more response to the coffee shopper coming in more frequently and buying more product.

But we've not been able to datamine that data yet and we are hopeful with LMS Phase 2, we will be able to do more of that and get a better understanding the frequency and buying habits of the consumer; that's to come later on in 2016. But we do know the average shopper shops about 3.5 times per year per visit; our best customer shops close to eight times per year. And that's Ollie's Army only, so --

Okay. That's great. One last question that I'd like to sneak in. You talked about getting better buying opportunities as you become a public company. I was curious on the real estate front, as you're looking at new stores, do you find that perhaps you have a bit better negotiating power with leases and real estate overall?

Yes, Peter, we believe there's some benefit there and definitely, when our balance sheet looks a lot better than it used to look, post-IPO, but the notoriety. The folks who own the real estate feel much better working with a public company because they get a lot more information than you normally would with a non-public company. And we are definitely seeing better results with these sites we are able to, to be able to secure at this point in time.

Okay. Sounds good. Thanks a lot. Keep up the good work.

Thank you.

David Mann, Johnson Rice & Company.

Yes. Thank you. Good afternoon. Let me add my kudos to the quarter and the year. Question about -- back on gross margin and the Georgia distribution center. Can you talk a little bit about the cost headwinds you're seeing there, and when you would expect those to abate?

Yes, Dave, we are actually starting to see those abate and that was obviously part of the positive impact in Q4 with regards to lower transportation cost and distribution center cost. The DC is starting to become more utilized.

We would hope to see continued leverage in the distribution center in part of -- in all of fiscal 2016. My expectation would be when we get to full utilization, which is sometime in late 2017, you should start to see us maximize the efficiency in that building.

Great. And then to follow up, the -- we're starting to see an increase in bankruptcies in retail among suppliers. So I'm just curious, let's say with the large sporting goods retailer that's filed and some other pressure in that industry. First, are you seeing the opportunities there and how quickly are you able to capitalize on things like that to get that in the stores?

Well, anytime, David, as we've talked about -- any time there is a disruption in the market, whether it might be a sporting goods company that's going out of business, a retailer that's going out of business, or a major retailer that might be reducing the amount of SKUs, anytime there's a change in a buyer at a major retailer.

Anytime there's something that happens in the market that can prove positive to us. Now how quickly can we react? This afternoon? And that's the beauty of our model because we have to be nimble enough to be able to react like that because when the product is available and when we're asking someone to sell to us at little to no profit or and/or loss, we've got to be able to buy the goods, take the goods, say yes.

They want to get rid of the problem today and not have it linger. Now specifically, have we seen more offerings in that type of category? I would say not yet. But sometimes it takes a little time to get there. Sometimes even the -- it's not generally the retailer that's going to offer us the product. It's the retailer supplier that might have a backlog and sometimes for that backlog to really become inventory constipation, it takes a little time, so --

Thank you very much.

Thanks Dave.

Thanks David.

(Operator Instructions)

Dan Binder, Jefferies.

Yes, thanks. I just had a question around the weather. You noted that, that was helping the first quarter. Do you expect that you're -- you will pull forward some business or just an aggregate sell more and not have a meaningful impact on Q2?

Well, of course, we're not giving you guidance on the rest of the quarters, but I'm telling you I feel really, really good about where we're at now. The -- anything weather-related, lawn and garden-related is performing well right now. We're hoping, Dan, that we're going to sell a lot more of it this year. That's our goal. But I'm telling you, I'm feeling really, really good where we are at right now.

Okay. Great. Thanks.

Thanks.

Thanks Dan.

Thank you. I'm showing no further questions. I would now like to turn the conference over to Mark Butler for any closing remarks.

Okay. Thank you, everyone. We are pleased with our fourth quarter results and the momentum of the business into 2016. We look forward to speaking to you again on our first-quarter call currently planned for June 1. Thank you very much and everybody, have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.