Ollie's Bargain Outlet Holdings Inc (OLLI) 2017 Q4 法說會逐字稿

Good afternoon, and welcome to Ollie's Bargain Outlet conference call to discuss financial results for the fourth quarter and full year fiscal 2017. (Operator Instructions) 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; John Swygert, Executive Vice President and Chief Operating Officer; and Jay Stasz, Senior Vice President and Chief Financial Officer.

I will turn the call over to John Rouleau, Investor Relations, to get started. Please go ahead, sir.

Thank you, and hello, everybody. A press release covering the company's fourth quarter and full year fiscal 2017 financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section of the company's website.

I want to remind everybody that management's remarks on this call may contain forward-looking statements, including, but not limited to, predictions, expectations or estimates and that actual results could differ materially from those mentioned on today's call. Any such items, including our outlook for fiscal year 2018 and 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 should speak only as of today, and we undertake 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 SEC filings. We encourage you to review these filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q for a more detailed description of these factors.

We will be referring to certain non-GAAP financial metrics 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 our operating performance. Reconciliations of these non-GAAP financial measures to the most closely comparable GAAP financial measures are included in our earnings release.

With that said, I'll turn the call over to Mark.

Thanks, John, and hello, everyone. Thanks for joining us on the call today. We had another very strong quarter and fiscal year. The fourth quarter was our 15th consecutive quarter of positive comps, and we achieved record top and bottom line results, both in the quarter and the full year.

Our deal flow remains very strong. Our new stores performed above our expectations, and we tightly managed expenses. We delivered a 35.6% increase in adjusted net income on top of a 25.9% increase in sales. Comparable store sales increased 4.4% in the quarter versus a 2% increase last year and a 2-year stack of 7%. Our sales strength was broad based with nearly half of our departments comping positive.

Some of our best-performing categories were housewares, health and beauty aids, bed and bath, furniture and clothing. Our strong fourth quarter was a fitting end to a banner year for Ollie's. In 2017, we achieved the highest sales and earnings in the company's history. For the year, sales increased 21% to nearly $1.1 billion and adjusted net income increased over 33% to $81 million. Since our first store opened almost 36 years ago, our goal has always been to sell Good Stuff Cheap and give our customer Real Brands! and Real Bargains! each and every day. This has always been our formula for success and continues to be our guiding principle.

We're confident in our ability to continue growing the business by focusing on 3 key drivers: increasing our offerings of great deals; growing our store base; and leveraging and expanding Ollie's Army. Our overall deal flow remains very strong, and we're see a growing availability of product from both existing and new vendors. We're strengthening our relationships with major manufacturers and gaining better access to merchandise.

Scale matters. And with 274 stores, we strive to the be the first call for the majority of all these available deals. The closeout buying environment remains as strong as I've ever seen, and I'd like where Ollie's is positioned as a growing force in one of the most dynamic retail sectors in America today.

Our new stores performed above our expectations for both the quarter and the full year. We opened 3 new stores during the fourth quarter and 34 stores in the fiscal year, including our first store in the State of Rhode Island. Our new store model is built for growth, it's portable, it's predictable, and most importantly, it's profitable.

In 2018, we anticipate opening 36 to 38 new stores, including our first stores in Arkansas and Louisiana. We've opened 6 locations so far this year, and they're all off to a great start. We've a strong pipeline of leasing opportunities and continue to be excited about our prospects for growth, both in the new and existing markets with the potential to grow our store count to over 950, more than 3.5x our current base of stores. As we grow our store count, we're expanding and leveraging our base of loyal customers. Ollie's Army is now close to 9 million [bargain-hunters] strong and continues to outpace our store growth. As we've discussed previously, our initiatives for 2018 include the implementation of ranks in Ollie's Army, and Ollie's Army members will receive different rewards and surprise offers based on their level of spending and also the launch of a mobile app that will make it easy for members to track their rewards and allow us to communicate the latest and the greatest deals. These initiatives are designed to reward member loyalty and build lasting relationships with the bargain battalion.

In summary, we feel very good about the positioning of the business and our ability to continue executing against our strategic growth initiatives in 2018 and beyond. We have a pretty simple model. We buy cheap, and we sell cheap. That philosophy, coupled with consistent execution, tight expense control and successful new store openings, has driven our business for nearly 36 years and remains our focus today.

I'd like to thank our nearly 7,000 team members for their incredible work and dedication to the business. Our success is truly a testament to their hard work and their commitment. I'd also like to take a moment and congratulate John and Jay on their recent promotions. As announced in January, John has been promoted to the Executive Vice President and Chief Operating Officer and Jay has been promoted to Senior Vice President and Chief Financial Officer. These changes are a planned part of the evolution of our business and put us in even better position to execute and manage our long-term growth. I look forward to continuing to work closely with John and Jay, and I'm confident both are going to excel in their new roles.

Thank you, again, for everybody's support of Ollie's. I'll now turn the call over to Jay to take you through our financial results and the 2018 outlook in more detail.

Thanks, Mark, and good afternoon, everyone. We're thrilled to have delivered another strong quarter and fiscal year. As a reminder, the fourth quarter and full year '17 results include a 53rd week compared to 52 weeks in fiscal '16.

Net sales increased 25.9% to $356.7 million, including $16.5 million from the 53rd week. On a 13-week basis, net sales increased 20%. Comparable store sales increased 4.4% over a 2% increase in the fourth quarter of last year and a 7% increase on a 2-year stack basis. The increase in comp store sales was driven by an increase in average basket, partially offset by a slight reduction in transactions.

As Mark said, we opened 3 stores during the quarter, ending the year with 268 stores in 20 states, an increase in our store base of 14.5% year-over-year. Our new stores continue to perform above our expectations across both new and existing markets, and we remain very pleased with the productivity of our entire store base.

Gross profit for the quarter increased 23.9% to $140.5 million and gross margin decreased 60 basis points to 39.4%. The decrease in gross margin was in line with our expectations and driven by increased supply chain costs. Merchandise margin was -- for Q4, was flat to last year.

SG&A expense increased 18.2% to $82.5 million, and we leveraged SG&A expenses by 150 basis points to 23.1% of net sales.

Operating income increased to 34% to $54.4 million and operating margin increased 100 basis points to 15.3% of net sales. Net income increased 186.9% to $70.1 million and net income per diluted share increased a 174.4% to $1.07. Including -- included in the $1.07 of net income per diluted share is a $0.50 benefit related to the 2017 Tax Act and a $0.07 benefit related to the accounting change for stock-based compensation. Adjusted net income, which excludes these benefits as well as the after-tax loss on extinguishment of debt increased 35.6% to $33.1 million or $0.51 per diluted share. The additional week in the quarter contributed less than $0.01 to diluted EPS.

Adjusted EBITDA increased 31% and 70 basis points to $59.2 million in the fourth quarter. For the 53 weeks of fiscal '17, net sales increased 21% to $1.077 billion. On a 52-week basis, net sales increased 19.1%. Comparable store sales for the year increased 3.3% versus a 3.2% increase in the prior year and a 9.2% increase on a 2-year stack basis. Net income for the year increased 113.5% to $127.6 million or $1.96 per diluted share and adjusted net income increased 33.4% to $81.1 million or $1.25 per diluted share.

Turning to the balance sheet. At the end of 2017, we had $39.2 million in cash and no outstanding borrowings under our revolving credit facility. We paid down approximately $146 million in term loan debt during '17 and ended the year with total borrowings of $49.2 million. Inventory at the end of the year increased 21.5% versus the prior year, primarily due to new store growth and the timing of deal flow. Capital expenditures totaled $19.3 million in 2017 compared to $16.4 million in '16. The increase year-over-year was driven by opening of the 3 more stores and completion of our new data center during the year.

Turning to our outlook for fiscal '18. Bear in mind that our guidance for '18 reflects a 52-week period versus 53 weeks in '17. For the year, we expect total net sales of $1.2 billion to $1.21 billion, an increase of 13.2% to 14.1% on a 52-week basis. Comparable store sales growth of 1% to 2%, the opening of 36 to 38 new stores and no planned closures, operating income of $149 million to $152 million, adjusted net income of $109 million to $112 million and adjusted net income per diluted share of $1.65 to $1.69, with both of these ranges excluding any impact from the accounting change for stock-based compensation. We are planning an effective tax rate of 26%, lower than prior years due to the 2017 Tax Act, resulting in a benefit of approximately $18 million or $0.27 per diluted share, of which, we are planning to reinvest approximately 20% or $0.05 per diluted share. We estimate diluted weighted average shares outstanding of 66 million and capital expenditures of $23 million to $25 million.

Let me add a few other items that might help you in your modeling. The shift back to a 52-week fiscal year in 2018 will create some differences in our quarterly reporting calendar. As a result, we expect the year-over-year growth in our total sales to vary from quarter to quarter. For the first and third quarters, we are forecasting total sales to increase in the mid to upper teens. For the second quarter, we are forecasting a total sales increase in the low double-digits. And for the fourth quarter, and as a result of the 1 less selling week, we are forecasting a total sales increase in the mid- to high-single digits. On a comparable store sales basis, we are forecasting comps to be consistent across each of the quarters in the 1% to 2% range.

We are forecasting a flat gross margin for the year of approximately 40.1%. As mentioned, we are currently planning to reinvest approximately 20% of our savings from the 2017 Tax Act in our associates. Beginning in the second quarter, these reinvestments are expected to impact SG&A by approximately 40 basis points. And as a result, we are forecasting SG&A to delever 20 to 30 basis points in 2018. We expect depreciation and amortization expense to be in the range of $14 million to $14.5 million, including approximately $2.5 million that runs through cost of goods sold. We anticipate net interest expense to decrease to approximately $1.5 million.

Given the continued strength of our new stores, we're now modeling first year of sales at $3.9 million. The cadence of our new store openings this year is more weighted to the back half of 2018. Approximately 1/3 of our openings will be in the first half of the year and 2/3 in the second half. In 2017, our store openings were more evenly split between the 2 halves of the year.

In 2018, we will adopt the new accounting standard related to revenue recognition, which impacts certain aspects of our accounting for Ollie's Army and our gift cards. The 2018 outlook reflects this impact, which we've estimated as a $2 million reduction to revenue for the year.

I'll now turn the call over to John for some more thoughts on the first quarter.

Thanks, Jay. With 15 conservative quarters of positive comps, we're up against our own good numbers, and there are no easy comparisons going forward. Having said that, the underlying trends in our business remain very strong, and we remain confident in our ability to continue driving top line sales and profitable growth. There are still several important weeks of business left in the first quarter. We are pleased with our quarter-to-date sales trends and would expect our first quarter comparable store sales to be at the high end of our annual guidance of 1% to 2%.

We celebrated the grand opening of 2 stores today and are pleased with the initial performance of our new stores this year. As Mark said, we feel very good about all the underlying trends in our business from deal flow to expense control to new stores. The consistency and strength of our business model, combined with our growing size and scale, gives us confidence in our ability to continue driving long-term shareholder value.

I'll now turn the call over to the operator to start Q&A session. Operator?

(Operator Instructions) And the first question will come from the line of Matthew Boss with JPMorgan.

We can jump to the next one, and we'll circle back with him if he gets back on.

And the next question will come from the line of Brad Thomas with Key Capital Markets.

A couple of questions, if I could. Maybe, first, on the outlook for store growth. If I'm doing my math right, then 36 to 38 stores looks like about 13% to 14% door growth, which should be kind of at the lower end of your mid-teen range that you've historically done. I guess, could you talk a little bit about the outlook for stores this year and maybe the potential for you to accelerate that if you find some good locations that you might be able to sign?

Sure, Brad. This is John. With regards to the overall cadence of our store growth, we only said 36 to 38. We feel that it's pretty much right in line we've been experiencing for the last several years and in line with our expectations in the 14% to 15% range. So if there's opportunities that we could step on the gas pedal a little bit this year, we would. But I don't foresee us getting above the 38 store number for this year. There is a little bit delay in the cadence of the store openings this year. Last year we've about 50% -- in the first half and 50% in the second half, this year we're planning 1/3 in the first half and 2/3 in the second half of the year. Most of that is related to the nature of the business, of us opportunistically seeking out sites and then some construction delays out there in the marketplace today. That's just something that's taking longer to get completed than we would have liked. But nothing -- nothing that's concerning, nothing we're worried about. So the pipeline is full of stores, and we'll continue to move forward with our real estate strategy to be intact with what we've done historically.

And Brad, this is Jay. I'd just add on to that. I mean, right. This is right along with our -- right in line with our long-term algorithm mid-teens unit growth, which drives our mid-teen revenue growth.

Great. And if I could follow up then on the margin outlook here for the year. Jay, you noted the 40 basis points investment in the business and SG&A. Any color you could share on the timing of how that starts to flow through by quarter over the course of the year and then just on the gross margin side of things, anything we should take into consideration as we're modeling the quarters?

Sure. So on the SG&A, the reinvestment of the tax benefit, we've got that model to start beginning in the second quarter. And again, it's about 20% of the $18 million. So that's how we have that modeled. And from a gross margin standpoint, right, I think, we would follow pretty closely along, if you do the math to last year's quarters, but that said, right, I mean, overall, we target the goal of the margin is a goal of 40%, we've always been able to manage around that 40%. I mean, in this year, certainly, we've got headwinds just like a lot of other people on supply chain side that we're going to have to deal with as far as the tightening trucking market, increase in fuel costs as well as this year, right, we're going to annualize on a full year basis, the fact that we've taken down additional square footage at our DC and Commerce, Georgia. So we're -- we've got all that baked into our outlook, and we believe at a high level that those increase in costs will be offset by increased merchandise margin. And that's, ultimately, how we get to a flat margin year-over-year of -- at the 40.1%.

And the next question will come from the line of Matthew Boss with JPMorgan.

So a larger picture, Mark, I guess, as we think about this year, what's the best way to think about the quarterly cadence of comps. I think you said it would be pretty consistent. But any comments on the first quarter to date? And then just larger picture, any change in the overall availability of goods as we think about the backdrop going forward?

Yes, I'll go with the -- certainly, with the goods and the merchandising side. And Matt, this is as good as I've ever seen it been. The phone keeps ringing, the buyers keep buying, we keep getting great deals, we get major name brands, we're selling them at drastically reduced prices. And then most importantly, the consumer is coming in and responding to our offerings. I'd a very high-level and the boys can give you the -- a somewhat more specifics. But you know, Matt, how I run, and we plan the business with 1% to 2% comp, that's very, very consistent. We're up against our own good numbers. And there is a little bit of shift this year because of some of the holidays and this 53rd week. So there's a little bit of noise in everything, but not so much in the comps, but in everything else. So -- but the boys can give you a little bit more of the quarterly cadence.

Sure. Matt, this is Jay, and I can speak to that. From a comp standpoint, we are planning a 1% to 2% comp, and that generally consistent across the quarters. We do have a little noise in our total sales, which we spoke to. But from a comp standpoint, it's very consistent. And as far as nuancing that by quarter, we would look at Q1 and Q3 to be towards the high end of the 1% to 2% comp range and Q2 and Q4 would be towards the low end. And that's simply just looking at our past year performance and the 2-year stacks, and of course, we know that in Q2 last year, we had an impact from the spinners.

Great. That's helpful. And then just a follow-up, can you talk about the decision that you made to invest 20% of the tax savings back into the business and your associates? Are you seeing any changes in the competitive backdrop anywhere in particular? And with this reinvestment, do you think this brings you back up to the competition or anything additional we need to think about from a wage pressure perspective going forward?

Yes, Matt, we just candidly have not felt and experienced any pressure. But we do think it's the right thing and the prudent thing to do because we do think that the competitive landscape is likely to change by what we understand it, too. So we want to be prepared. It certainly could be in training, it could be in our new store opening procedures and processes. It could be in wages. It could be all of the above. But we -- what we do -- want to do is, most importantly, maintain the level of our associates that we have been able to enjoy and make sure that we take care of them. And we think this is the right way to plan the business, and we'll make a good business decision that's in all shareholders' mind, going to be a good one.

The next question will come from the line of Dan Binder with Jefferies.

My question is kind of an extension of some of the other ones. Just first on the Q1 period. I know it's not a surprise to anybody the weather has been challenging. Just curious when you look at the slight deceleration in the comp at [year 2] versus what you just recorded, is most of that a function of the seasonal businesses? And then secondly, on the freight side, you mentioned some pressures there. I was just wondering if you can quantify what that looks like and what your exposure to the stock market looks like?

Yes, what we're -- Dan, this won't come as a surprise to you. I don't agree with the deceleration. We're up against our own good numbers. We feel really good about where we are right now in Q1. We still got some really, really important weeks ahead of us. But we feel, overall, very, very good. As far as the other question...

Yes. Dan, obviously, this is John. There has been some weather issues that we're all dealing within the marketplace. So we've really not seen, as you can see with us going to the high-end of the 1% to 2% range for the quarter, coming off of a 2-year stack of a 7.7% 2-year stack, we're going up against our own good numbers as we said. So we don't see that as a deceleration. We think that our numbers are strong, the business trends are moving forward in the right fashion. We're excited about it. And obviously, we're going to try to do better that what we put out there. But we're going also try to be prudent in our guidance to you guys.

Understood. And then on the freight side, any color around what -- quantifying those pressures and then just what your exposure is to the spot market, which seems to be where most of the pressure is?

Exposure to what, Dan, I'm sorry.

To spot market on freights?

Dan, this is Jay. That's just not something we're going to quantify on the call.

And next question comes from the line of Elizabeth Suzuki with Bank of America.

Are there other investments that you're planning with the other 80% of the tax benefit that would be considered incremental on that you wouldn't have already put into new stores?

Liz, this is John. The answer on that is no. We've -- the other 80% would basically just flow through to the shareholders. There is no other incremental delayed projects or incremental projects we're looking to do with the tax savings. We'll continue to generate cash and pay down debt. But other than that, there's no other projects that we'd delay that we need to do on the horizon.

Great. And has there been any response to the press release you put out regarding purchasing Toys "R" Us closeout inventory? And just how does the deal flow look there? And what do you see as the potential opportunity both from a merchandise standpoint and real estate standpoint?

Well, look, this is what we do for a living. And anytime there's a disruption and any kind of mercantile business, we think we have the opportunity to be able to take advantage of it. And this unique opportunity, we might be able to also get some sites. I would point out that the subject we're talking about, many of those sites are not even vacant yet. But we think that there may be opportunities for that, the merchandise side. Toys are a big portion -- not a big portion, they are a substantial portion, meaningful portion to our business and it excites the consumer. We do think there's an opportunity there, we think there's going to be a lot of product available, and we just wanted to remind everybody how do we make a living. And that if they do have any product that we might be help them out and might be a win-win for both of us. And then the third thing is, there might be some human capital that we'll be able to take advantage of because it's going to be a lot of experienced store managers and assistant managers that are out there that might need employment. We'd love to be able to talk to them as well. So this is a constant reminder. This is how we make a living, whether it be a disruption in the container market, maybe a year or a 1.5 years ago or any kind there is a closing of stores or a closing of a factory. Anytime there's a disruption, we have the ability to be able to take advantage of it.

Great. And just a quick follow-up on that is, for toys, generally, what are the margins -- gross margins tend to run at in terms above or below or at company average?

Liz, this is John. We don't normally give margins on a departmental level, but I would tell you toys are somewhere in the right the middle of the road for us.

And the next question will come from the line of Peter Keith with Piper Jaffray.

This is actually Robby Friedner, on for Peter today. Just a follow-up on the toy space. Compared to a sporting goods benefit, you guys are following the Sports Authority liquidation a couple of years ago. Can you maybe size up the opportunity here in toys? And also, would you expect benefits to be more geared to the holiday season? Or can you perhaps see benefits in Q2 and Q3?

Well, I think that -- we -- the toys certainly sell better in the first quarter. We wouldn't quantify -- fourth quarter, fourth quarter I'm sorry. We wouldn't quantify how big it's going to be because I'm going to tell you it's very, very early in the process, and we don't know. But we are ready, willing and able to take advantage of the situation. We can take the product, we have the logistic capabilities, we have the cash to be able to turn any product into cash for these manufacturers. So don't know how it's going to shake out yet. But we do think it might be an opportunity. But that being said, just like there was an opportunity in sporting goods, there is an opportunity perhaps in toys this year, we -- something always pops up, then we're ready, willing and able to take advantage of it.

Okay. Great. And just as a follow-up there, say perhaps the closeout opportunity is robust in toys. Would there be -- would you anticipate like the incremental freight headwind around that? Or is your freight outlook -- the path to toy closeout baked into your freight outlook?

Obviously, the freight outlook is really our cost to ship goods to store. So I would say on the overall purchasing cycle, the freight is baked into our numbers and our margins for the full year basis.

And the next question comes from the line of Scot Ciccarelli with RBC.

Maybe I misunderstood the comment. But Mark, did you say that just over half of your categories comp positive in the quarter. I guess, I'm trying to square that with nearly 4.5% comp that you did post and what looks like about a 5.5% comp in January?

Yes, I think it was about half of them that did, but I think, it's normal, that's consistent with probably or many previous quarters, Scot. Very, very consistent.

Okay. So in other words, a typical quarter complexion is really -- you have half of your categories flat to slightly negative, and you've got another half that are up basically high-single digits or double digits, that's the normal cadence?

Certainly, could be and it's all deal driven.

Okay. Got it. And then the second question is regarding the -- one more on the store expansion. The 36 to 38 stores expected for this year, should we actually start to think about that as a good rate to use for future expansion in terms of a number? Or should we continue to think in terms of percentage store growth figure because, I guess, I've I always kind of thought about on a percentage basis?

Yes. Scot, this is John. I would say for right now, I would look at it on a percent basis. I think there will come a point in time, where we hit a certain number of stores that we may need to start thinking on a store basis, but we have not reached that yet. I think we're going to be closer to 50 to 55 stores on an annual basis before we start to, maybe, go away from percentage perspective and go to a whole number.

The next question comes from the line of Rick Nelson with Stephens.

(inaudible) leverage was better than expected. Obviously, comps and store productivity a driver to that. But if you could speak to the rent markets today maybe versus a year ago, are you seeing more attractive rent rates?

Rick, this is John. With regards to the rental rates in the marketplace, we've always been a very opportunistic rent selector per se. So in terms of the overall rent per square foot or changes in the market for us over the last several years, it's actually pretty much very consistent. We've been able to take advantage of some of the boxes that have gone out and maybe get slightly better locations in certain situations than we were in the past. But the rent on an overall basis has been pretty consistent over the last several years for us.

Thanks for the color. Also, like to ask about your rollout plans for the period, Ollie's Army and how you see that impacting financials?

Rick, I'll take a little bit, and Mark may kick in here. But with regards to the ranks within the Army, it's a -- I'd say, it's a pretty simple program. Remember, these folks make up the majority of our sales already. So we already have a very, very loyal following. We're looking at ways to try to get the folks who are not as active as we might want them to be to become a little more active to get to the next level and reward those ones who are very active by giving them additional incentives. I don't want to go into specifics. We're actually in the creation of the program as we speak today. But what will happen is we'll have a 1-star, a 2-star and a 3-star general within the Army, and they'll be able to get the more -- basically the more as they spend, and they get to certain ranks the more we're going to offer to them from a special discount perspective or special offers that other folks may not get within the Army. We'll be able to bucket these 3 different groups of people to try to motivate the 1 stars to become 2 stars and then 2 stars become 3 stars. But in terms of our overall quantification of the Army and the financial impact, we're not going to go there. At this point in time, we're going to see what happens and how that rolls. As we've said, we already have a very loyal team following. So we're not sure how much that would drive incremental sales, while we believe the program will add loyalty to it. We're not sure that the overall drivers behind it. And also, Rick, we're also introducing pretty much in the same time in Q2, we're going to introduce the mobile app, which will give another avenue for folks who want to create -- carry their smartphone and know what their point balance is at any given time, have their coupons on their phone at any point in time, their card number, all those things that make it easier to operate and understand the program will be just to give them another vehicle to help hopefully enhance loyalty as well.

Finally, if I could ask on the balance sheet, you reduced debt year-over-year by -- it looks like $150 million. You've got $38 million left on more than sufficient free cash to reduce stock. Wondering what your thoughts are beyond debt paydown?

Rick, this is Jay, and I can speak to that. We've got about $49 million of debt when you include the current portion in there. But as you know, as we've talked about, right, our plan for this year is to pay that debt down so we would expect to be debt-free by the end of the year. And we probably end the year with a cash balance of about $70 million to $80 million at that point after the debt paydown. So I think, that's kind of step one for us. And then as we move into next year and that cash starts to build further, we're going to continue to have discussions internally with our board and what makes sense from a capital allocation standpoint and the best way to use that excess cash and return value to the shareholders. But that's going to be discussion really once we get through this year.

(Operator Instructions) And our next question will come from the line of Patrick McKeever with MKM Partners.

Just another question then on the Ollie's Army, maybe you could just give us the numbers there in terms of the total number of members and the growth rate? And then a question on gross margin guidance for 2018, you said flat with some pressure on supply chain offset by, I think, you said higher merchandise margins. So my question is just where are you expecting the improvement in merchandise margins in 2018?

Patrick, this is John. I'll take the first question, and let Jay take the second. With regards to the Ollie's Army, you kind of reiterate some of our statistics, so about 8.8 million member strong at the end of the year. Ollie's Army members make up approximately 70% of our overall total sales of the company as of the end of year 2017, they spent about 40% more than non-Ollie's Army members, and they're obviously, our most loyal customer that we have from that perspective. So on a 5-year basis, the CAGR is just north of 27% on the growth of the Army.

And Patrick, this is Jay. In regards to margin, like we said, our long-term goal on margin is always around that target of 40%. We demonstrate an ability over the years to manage through that with the different puts and takes, whether that's transportation or pricing on goods. So we're confident in our ability to do that. Like you said, we've got headwinds in our supply chain costs baked into that. So we are planning an increase in merchandise margin and a couple things play into that, right. In Q4, we saw a 60 bp decrease in our margin overall and that was largely fueled by the supply chain costs. We actually had flat merchandise margin year-over-year for the quarter, which was a good sign. Those margins are trending the right way. And the deal flow, like Mark has said, has been strong and continues to be strong. So as part of that, obviously, the merchandise margin can fluctuate any quarter based on the sales mix and the pricing and the deals at hand. But with the pipeline so strong, we feel like we're in good position this year to take price related to our merchandise margin.

And then I know you said, it doesn't sound like the extended, prolonged, probably a better word, winter weather has had a much impact on your seasonal businesses. But I've seen a fair amount of fertilizer and potting soil and outdoor furniture and cushions and those kinds of things in stores. So question is, is there any markdown risks with that merchandise? Or is there still an -- a decent window here with which to -- in which to sell it at the full price as you have it currently?

Patrick, this is no different than it was 35.5 years ago. This is spot on. Certainly, we have a greater stretch of our geography going from Rhode Island, all the way down to Florida and then all the way to the Mississippi. But our spot of where we are in the merchandising and the amount of pots, the amount of fertilizer, we're exactly where we want to be. I -- we have absolutely no conversation of any merchandise risk. Certainly, if weather gets warmer in Rochester, New York, next week, we're probably going to sell a lot more fertilizer than we do this year or than we did -- are right now. But there is absolutely, this is no different than what we've done any other year. And this isn't the first April that I have gone through that has been this cold. So we feel really good about where we are and our results. So we've got a couple of really big weeks ahead of us. And then, by the way, Q2 is right around the corner, but we feel good about where we're at.

And the next question comes from the line of Vincent Sinisi with Morgan Stanley.

Just a quick question or 2. Just going back to the associate investment, just want to be sure. I certainly understand a lot of companies are doing that. Is that for you guys? Is that concentrated strictly at the associate level? Any change at the manager level or any change or thoughts around, just kind of that headcount per store?

Vince, this is John. With regards to the -- where our thought process is right now, it's more centered around the associate level from a pure wage perspective. But we are looking at other items with regards to benefits in training and whatnot that may not just be at the associate level, it could be at manager level and another areas within the business. But the big crux of the number would be more focused on the associate level, but we have some investments we think we can make, that will be beneficial to the long-term retention of not only associates, but also management level people as well. So it's kind of how we're looking at it today.

Okay. All right. And then just one quick one on the margins for '18. I know that you said, obviously, kind of some of the supply chain headwinds will continue. Just to kind of get to that flattish gross margin for the year, what's implied from a freight perspective? Are you kind of thinking -- kind of in your outlook that things kind of stay as they are today? Does it get better? Or does it get worse? And then, I guess, kind of anything else outside of freight just on the gross margin line that we should be mindful of?

Vince, this is Jay. And like I kind of said to Dan we're not going to quantify a whole lot, but generally speaking, kind of the impacts we're looking on an annual basis is about 30 to 40 basis points from the supply chain cost increases and expecting that to be offset by a like amount in the merchandise margin improvement.

And the next question comes from the line of Edward Kelly with Wells Fargo.

This is actually Anthony Bonadio, on for Ed. So kind of thinking on the other side of tax reform here, with consumer starting to see a boost in their take-home pay, especially the lower income levels, are you guys seeing anything here on the top line that begins to flow through? And to what extent is that baked into your estimates there?

I don't think it's -- we baked anything more than our consistent planning process. I'd probably like to remind you that we are not really, really -- even though we sell Good Stuff Cheap, we are not really, really low-end shoppers. We have a middle-of-the-road shopper. And we just think that we're going to be as good as the deals and our offerings, and we think we've got a good plan. But we haven't baked in any incremental increase because of that. And we feel good about our plan.

Got it. That's helpful. And just as a follow up your store productivity continues to remain pretty elevated, at least from what we're calculating. Anything you can comment on there in terms of drivers?

I can start with that and if these guys have anything, they chime in. This is Jay. But from a modeling standpoint, right, we recognized that the new stores have performed above our expectations. So this year for our model, we didn't increase our new store plan to $3.9 million from $3.8 million. And if you do the math from a new store productivity standpoint compared to year-over-year, we're relatively conservative in that measure still.

And the next question will come from the line of Alvin Concepcion with Citi.

Just wanted to ask another question about your EBIT guidance. I think it's a little bit below consensus expectations and implies a little bit of margin degradation, which you talked a little bit about. Is that just an issue you think with pre-forecast? Or is this pretty much in line with what you're planning internally prior to this quarter? And can you talk about some of those puts and takes besides freight and the 53rd week? Any other thing we should think about?

This is Jay, and I can start with that. Really, the impact on the EBIT line is the reinvestment of the tax benefit, that's about 40 bps impact. So that's part of it. And when we looked at what was out there on the consensus, there was a little disparity on how people were treating the 53rd week as well as how people were treating the tax benefit from the 2017 Tax Act. But I think the big piece you're probably looking at is the reinvestment on the SG&A line.

Alvin, this is John. I think the big thing to keep in mind for all of us who are reinvesting into our associates through whatever means, you've got a little bit of different geography between SG&A and income taxes, so they do -- it does break up and mess up the EBIT margins a little bit. So I think, that's probably a common theme you're going to see amongst all of us who have significant tax savings and were reinvested above the line.

Got it. And what are you seeing in terms of general consumer sentiment from your customers post the holidays? It doesn't sound like you're expecting a huge boost from folks with higher paychecks. So I'm just wondering what you're actually are seeing?

As I said, I think, perhaps a couple of times on the Q&A, I feel good about where we're at. Certainly, there's been a little shift in the Easter holiday. I think we're going to be up against the Easter holiday in a few weeks, we had it, of course, last week. But we feel really good about where we're at. We still got some big weeks ahead of us. Sure we'd like the northeast to have a little bit better weather, but we feel really good about where we're at. I'm happy. I'm happy with our stock position. And I'll remind everybody, we're a deal-driven business. So we got really great deals in the store, and I'm excited about where we're at. So we feel good.

And I'm showing no further questions. I would now like to turn the call back over to Mr. Mark Butler, Chairman, President and Chief Executive Officer, for any closing remarks.

Thank you, operator, and thanks, everybody, for participating in our call and for your support in Ollie's. As you just heard, we're coming off of a great year and are excited for continued growth in 2018. We look forward to speaking to you again on our first quarter call in early June. Thank you very much, and have a good day.

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