Ollie's Bargain Outlet Holdings, Inc. (OLLI) Q4 2021 Earnings Call Transcript

Good afternoon, and welcome to Ollie's Bargain Outlet Conference Call to discuss Financial Results for the Fourth Quarter and Full-Year Fiscal 2021. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from Ollie's. And as a reminder, this call is being recorded. On today's call from management, we have John Swygert, President and Chief Executive Officer; Jay Stasz, Senior Vice President and Chief Financial Officer; and Eric van der Valk, Executive Vice President and Chief Operating Officer.

Thank you, Jonathan. Good afternoon, and welcome to Ollie's fourth Quarter and full-year fiscal 2021 earnings conference call. A press release covering the company's financial results was issued this afternoon and a copy of that press release can be found on the Investor Relations section of the company's website. I want to remind everyone 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 with respect 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 we undertake no obligation to update or revise them for any new information or future events.

Thanks, Jean and hello everyone. Thank you for joining our call today. Looking back at 2021, we navigated through numerous headwinds, including unprecedented inflation in merchandise and transportation costs, shipping delays of imported products and backlogs at our distribution centers. We worked aggressively to control what we can control by leveraging our vast network of vendor partners, improving efficiencies in our distribution centers and initiating negotiations of import container contracts earlier than normal, all while continuing to execute our retail expansion strategy and delivering great deals to our customers. Importantly, the changes we have made to our supply chain will enable us to navigate even better going forward. During the fourth quarter we delivered exceptional deals to our customers and made great progress getting our distribution centers back to desired throughput levels. We were able to secure additional important container capacity which enabled us to deliver our spring merchandise in a timely manner to our stores. We believe we're well positioned for the spring selling season. Turning to the fourth quarter results, compared to 2019, our comparable store sales decreased 2% in line with our expectations. We've remained focused on offering the most compelling values to our customers and are excited about the closeout opportunities we're seeing in the market today due to package changes created by inflation, supply chain challenges, canceled orders, excess inventory overruns, and product innovation. We expect to see more deals come our way due to late arriving canceled merchandise, and we remain nimble to ensure we capitalize on these deals. We're seeing strong deal flow in health and beauty aids, housewares, hardware, holiday seasonal, bed and bath, automotive, and pets. This type of environment plays into our strengths. Our merchant teams are nimble and able to react quickly to secure great deals that we know our customers want. The value we provide is more critical than ever as we recognize that our customers are being impacted by the rapid rise in inflation as prices for everything from gas to groceries have risen dramatically. While this leaves our customers with less discretionary income, we expect value to become increasingly important to all consumers. In addition, there are several other dynamics impacting our customers, including a shift in spending from goods to services and experiences, lack of stimulus, and the timing of tax refunds. In the long run, we know that our unique offering of compelling value will ultimately win. Turning to real estate, during the fourth quarter, we opened five new stores, ending the year with 431 stores in 29 states. We are pleased with our new store productivity levels. We are currently experiencing delays related to permitting and construction of our new stores. As a result, we plan to open between 44 to 46 net new stores in 2022. We remain confident that our model can support at least 1,050 stores in total and plan to resume a normal store opening cadence between 50 to 55 stores annually in 2023. We are excited to announce that for the first time in our company's history we are launching a store remodel program. We plan to remodel 30 stores to our newest merchandising format in 2022. The enhancements we are making to the stores are expected to improve our customer shopping experience and drive higher store sales overall. Ollie's Army remains an important driver of our sales, reaching over 78% sales penetration in the quarter. The Army grew 8.5% over the prior year, ending the period with over 12.6 million active members. We were pleased with Ollie's Army Night, where we once again opened our doors exclusively to Ollie's Army members for an evening of shopping and special discounts. This year marks our 40th anniversary and we have several special events planned to celebrate this milestone. In addition, during our week-long Ollie's Days’ event we will be including 40 terrific deals for our 40-year anniversary celebration. We have a lineup of other great events to create excitement, and we welcome you to join in. Operationally, we have made refinements and enhancements to our supply chain due to the tighter labor market and the ongoing impact of COVID. We continue to find ways to improve efficiencies in our distribution centers, and they are running well now. Our Pennsylvania and Georgia distribution centers have been operating at full throughput levels since the end of the third quarter of 2021, and our Texas DC reached the desired level in late February of this year. The 200,000 square foot expansion of our York distribution center is awaiting final permit approvals. We plan to start construction once permits are issued and at this point in time, expect to have it completed by the end of this year. This expansion will provide us with the ability to service an additional 50 stores, for a total of 200 to 210 stores from this location. This brings the total number of stores that we can service from our distribution centers to over 550. As we continue to expand our footprint, we plan to open our fourth distribution center in the second quarter of 2024. In summary, we are excited about our 40th anniversary, our store remodel program and the incredible deals we are seeing in the market. We feel good about our inventory position and have a strong offering in the spring seasonal product for our customers. That said, we recognize that we are navigating an uncertain, highly inflationary environment. While we are confident that we will return to our long-term algorithm, we anticipate continued pressure in the first half of 2022. We expect to see trends improve as we move through the second half of the year, positioning us to return to our long-term algorithm. We are focused on what we can control and believe that our business will benefit from an increased need for value, driving consumers to trade down. We are well positioned to capture this customer as a closeout retailer that delivers extreme value and a treasure hunt experience. The long-term potential of our business remains firmly intact. We have a long runway to at least 1,050 stores, we have a highly loyal customer base that generates almost 80% of our sales, and our stores generate a ton of free cash flow. We remain committed to returning value to our shareholders as reflected in our increased share buyback program that we announced in December. In closing, I would like to thank the entire Ollie's team for their hard work and dedication during what has been one of the most dynamic and challenging environments in our company history. We appreciate all that you have done to serve our communities and offer the best possible experience to our customers. As we say, we are Ollie's. I will now hand the call over to Jay to take you through our financial results.

Thanks, John, and good afternoon everyone. I want to start by thanking the entire Ollie's team for their incredible teamwork and dedication throughout the year. For the quarter, net sales totaled $501.1 million, a 2.8% decrease from the prior year. Comparable store sales decreased 10.5% in the quarter compared with the prior year. Comparable store sales compared to 2019 declined 2%. Late deliveries of key seasonal products negatively impacted early holiday sales. We had hoped that as our in-stock position improved as we moved through the quarter, we would benefit from last-minute shopping. However, we found that many of our customers shop earlier in the holiday season. In the quarter, we opened five new stores, ending the period with 431 stores in 29 states, and an 11.1% year-over-year increase in store count. Since the end of the fourth quarter, we've opened five additional stores. We plan to open 46 to 48 stores in 2022, including 2 relocations. Gross profit decreased 10.6% to $183 million and gross margin decreased 320 basis points to 36.5% compared to 39.7% in the same period a year ago. The decline in margin was due primarily to supply chain costs, which more than offset the 170 basis point increase in merchandise margin. SG&A expenses excluding a $100,000 gain on an insurance settlement in the quarter increased 160 basis points to 23.8% because of deleveraging due to the decrease in sales. Adjusted operating income, which excludes the insurance settlement gain totaled $57.3 million, a 32.1% decrease from the prior year. Adjusted operating margin decreased 500 basis points to 11.4% due to lower gross margin and deleveraging of SG&A expenses as a result of the decline in sales. Adjusted net income, which excludes the insurance gain and tax benefits related to stock-based compensation was $43.9 million, and adjusted diluted earnings per share was $0.69. Adjusted EBITDA was $66.1 million, and adjusted EBITDA margin decreased 470 basis points to 13.2% for the quarter. For the full-year of ‘21, net sales totaled $1.753 billion, a decrease of 3.1% compared to the prior year. Comparable store sales decreased 11.1% for the year and increased 3.6% compared to 2019. Adjusted net income in 2021, which excludes the insurance gain and tax benefits related to stock-based compensation was $152.9 million, and adjusted net income per diluted share was $2.36. Capital expenditures for the year totaled $35 million, primarily for new and existing stores; this compares with $30.5 million in the prior year. Inventories increased 32.1% to $467.3 million compared with $353.7 million as of the end of fiscal 2020, with almost half of the variance attributable to increased supply chain costs and the remainder driven by the increased number of stores and the timing of merchandise receipts. In addition, inventories as of the end of fiscal 2020 were reduced due to heightened levels of sales productivity throughout the fourth quarter last year. Most importantly, we are comfortable with the quantity and quality of our inventory in our stores to date, and believe we are well positioned for the spring selling season. At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $247 million in cash. During the fourth quarter, we invested $20 million to repurchase approximately 435,000 shares of our common stock. For the full year, we invested $120 million to repurchase approximately 3.1 million shares of our common stock. We currently have approximately $180 million remaining on our share repurchase program. I will share some high-level thoughts on fiscal ’22. Our full-year comp guidance is within the range of our long-term algorithm on a three-year basis. That said, we recognize that we are navigating an uncertain and highly inflationary environment, while lapping significant stimulus in the first quarter. At the same time, we continue to face higher transportation, product, and labor costs. We believe that these factors will have a bigger impact on our first half results as we lap these headwinds and begin to benefit from the actions we are taking to offset these pressures in the second half. Based on these dynamics, for the full year, we expect total net sales of $1.908 billion to $1.926 billion. Comparable store sales of flat to plus one were in line with our long-term algorithm on a three-year geometric stack basis. The opening of 46 to 48 new stores, including two relocations, we expect to open eight stores in the first quarter, 12 in the second, 17 in the third quarter, and between nine and 11 in the fourth quarter. We expect full year gross margin of approximately 37.2%, reflecting increased supply chain costs, especially during the first half of the year. We expect this margin pressure in the first half to result in similar year-over-year declines in gross margin in each of Q1 and Q2. We expect some sequential improvement in Q3 and a return to normalized overall gross margin levels in the fourth quarter. We expect operating income of between $182 million to $187 million. Adjusted net income of between $136 million to $140 million and adjusted net income per diluted share of $2.15 to $2.22, both of which exclude excess tax benefits related to stock-based compensation. Depreciation and amortization expense in the range of $28 million to $29 million, including approximately $6 million that runs through cost of goods sold. An effective tax rate of 25.4%, which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately 63 million. We expect capital expenditures of $53 million to $58 million related to new stores, store-level initiatives, our York DC expansion, and IT projects. For the first quarter, we expect total sales of approximately $417 million to $422 million. We expect comparable store sales to be down 15% to down 14% as compared to ‘21. On a three-year geometric stack basis, we expect to be slightly negative in Q1 as we lap unprecedented stimulus. Gross margin is expected to be approximately 35.8%, operating income of $26.5 million to $28 million, and adjusted net income of between $20 million and $21 million. And finally, adjusted net income per diluted share of $0.31 to $0.33, both of which exclude excess tax benefits related to stock-based compensation. In closing, while we will experience pressures in the first half of ’22, we expect improvement in our margins and metrics in the second half, anticipating a return to our long-term algorithm.

Our first question comes from the line of Brad Thomas from KeyBanc Capital. Your question please.

Hi. Good afternoon, John and Jay. I wanted to ask about how you're thinking about same-store sales as we progress through the year? I think if we're trying to do some quick math on it, given how difficult the comparison is in Q1. To get to the full-year guidance it does imply that perhaps you may be above your normal comp outlook as we get into the later quarters. Any more color you can provide on how you're thinking about comps through the year would be very helpful.

Yes, Brad. This is Jay. We are concentrating on the three-year geometric stack calculation, using 2019 as the starting point. For the full year, that comes in at about 104%, which falls within the range of one to two for those three years. As you mentioned, Q1 will be off by approximately 4% or 5%, so it will be closer to 99, or a negative 1 in Q1. We'll need to compensate for that in Q2, Q3, and Q4. When we do the calculations, that results in about 105.5 on a three-year geometric basis for the remaining quarters, which would average around 1.8% over three years. So, we’re still within the range. That’s our perspective on it.

That's very helpful, Jay. And then I thought the remodeling program sounds pretty encouraging. I was hoping you could just talk a little bit more about what that entails? How much you're going to be spending? And what sort of uptick you're looking for from those investments?

Sure, Brad, this is Eric. I'll respond to your question. We are very enthusiastic about this initiative. Our stores have been around for a while and need some updates. Our main goal is to improve the customer experience, particularly how products are displayed. We are adjusting and reorganizing categories to align with our new store format. For instance, we are reducing the space allocated to our books section and increasing the space for PAT. This is a strong example of the changes we are making. We are also enhancing the shopping experience for imports. Many of our older stores lack racetracks, so we are adding them where necessary and improving the capacity of existing racetracks. Additionally, we are reconfiguring the front end of the stores to include more register queues. It's important to remember that I will address your question about spending shortly. We operate in the deep discount sector, and it's vital that we maintain what we refer to as our semi-lovely charm. The store environment plays a key role in communicating our value proposition to customers. On average, we plan to spend around $125,000 per store, and we are currently in a testing phase. We have completed two remodels recently, and it’s still early in the process. We are happy with the initial results and expect the payback to align with the returns from new stores. However, it’s too soon to discuss how this will impact comparable sales, but we will provide updates in future quarters as we gain more experience with additional remodels.

I think Brad, the only thing I would add is that it's only 30 stores out of 440, which is a relatively small percentage. This is the year for testing and learning, and we will see what we learn from it. Then we can accelerate this initiative in 2023 and beyond.

Very helpful. Thank you all so much.

Thanks, Brad.

Thanks, Brad.

Thank you. Our next question comes from the line of Kate McShane from Goldman Sachs. Your question please.

Thanks. Good afternoon. Thanks for taking our question. We wondered if you could talk a little bit about traffic and how it trended throughout the quarter? Have you seen an improvement in traffic quarter-to-date? And just from our first-half back-half standpoint, with regards to the comp, why do you think the second half will be better? More commentary on what you will be lapping? Or is it that we will be further away from that March stimulus? If you could give a little color around that, that would be helpful. Thank you.

Kate, this is John. Let me answer your last question first and then maybe Jay can handle the question with regards to the fourth quarter. With regards to 2022 in the back half, we just believe that first and foremost, lapping the stimulus and getting all the stimulus out of the way is paramount to us to get back to running our normal business. But most importantly, we believe the second half will be able to lap what we had talked about a lot in Q3 of last year with regards to the delayed shipments, the challenges we had with the late arriving import product and the holiday product that basically collided with all of our closeout goods that were domestically sourced. And we had to prioritize the way we've moved our product through last year and the disruption we created with that. We just believe we're set up and we're positioned in a much, much better shape this year with our supply chain, our distribution centers are running at the right throughput levels that will be in a much better position to really kick off once we clear the stimulus here that started in March of last year and that we think ran through a good part of May, almost the end of May. So I think once we see that get out of the way and the position of inventory and store in a much better condition, we will be ready to go. And obviously, I think one of the big takeaways is, I think you mentioned and I forgot about is, the deal flow is really starting to pick up and we're starting to see some things shake loose. And I think we're in a position here. I am very sure that we're going to see some big benefits.

And Kate, this is Jay. Just to add on to the first part of your question, we're not going to get too detailed on the current quarter trends, so I can’t provide transaction specifics. However, I can say that the comparable sales we are observing so far are slightly better than our guidance. That being said, we are entering the peak period of stimulus from last year, so the next four to five weeks were extremely strong last year due to that stimulus. Therefore, we still have a long way to go, which is reflected in our guidance. Currently, we are trending a bit ahead of that.

Thank you.

Thanks, Kate.

Thank you. Our next question comes from the line of Peter Keith from Piper Sandler. Your question please.

Hi, good afternoon, everyone. John, I want to ask a follow-up regarding the closeouts you mentioned that are starting to come through, which you seem quite excited about. I was hoping you could reflect on 2021. You've consistently stated that closeouts have been strong throughout the year, but I'm curious if there's a difference between quality and quantity. While there may have been a good number of closeouts, do you feel that over the last 12 months, the quality has perhaps been lacking due to the global supply chain challenges?

We haven't noticed any impact on the quality of our closeouts. The main challenge we faced last year was our ability to move goods through our network. This was a significant takeaway for us. Our merchants faced difficulties because they had purchased products intended to arrive at specific times for certain advertising campaigns during the seasonal selling period, but those timelines were not met. This situation hindered their ability to execute effectively and impacted our capacity to include the right items in our advertisements across all locations. I don't believe it was a quality issue. We naturally need some standout deals to drive sales, and due to the supply chain struggles we encountered last year, we weren't able to perform at that level. However, this year, we're observing good quality inventory and can move it through the network to the stores in a timely manner. As a result, our merchants have regained their momentum and confidence, enabling them to execute successfully. We're currently coming from a position of strength and are beginning to see the closeout opportunities start to develop as we anticipated. We're just beginning to see a strong flow of deals now. I prefer not to delve into details due to competitive reasons, but overall, we're feeling optimistic about our current position, and the numbers will reflect that.

Okay. All right, that's encouraging. And maybe separately talk to Jay on this one, but the merchandise margin, I think, up 170 basis points, so it's accelerating a little bit from Q3. Just in regard to that, is it pricing? Are you guys being able to take a little more price than you were earlier in 2021? Maybe the competition has loosened up a little bit, can you talk about how you're maybe offsetting some of these elevated freight costs?

Yeah. Peter, that's a good call. And yeah, I think, to your point, we were able to take some price in the quarter. And we talked about that on the last call, so that did come to fruition. I mean obviously, it's very important that we maintain our value proposition. But yeah, merchandise margin is up 170 basis points, and then the overall was down 320 basis points. So the supply chain was the remainder of that. And when we look to our plan for 2022, I mean we are expecting some level of expansion on merchandise margin to continue. Obviously, we're going to continue to have headwinds on the supply chain side, but those are heaviest in the first half, they start to abate in the third quarter and then the fourth quarter is really kind of a normalized historical margin.

Okay. It sounds good, guys. Good luck.

Thanks, Peter.

Thank you. Our next question comes from the line of Matthew Boss from JP Morgan. Your question please.

Great. Thanks. So, John, on the topline, maybe could you just speak to any behavior changes that you're seeing from your low-income consumer potentially tied to inflation or any trade down that you're seeing yet from the middle-income consumer? And Jay, tied to that, as we bridge to the first quarter down mid-teens, so that full year flat to up 1 comp, are you embedding today's macro backdrop or are you baking in any impact from potentially higher gas prices as the year progresses?

Yes, this is John. I’ll address the question regarding lower-income consumers. We’ve noticed that very low-income individuals, including those on fixed incomes or welfare, are really feeling the pressure right now, and this has been ongoing for some time. Grocery shopping has become quite shocking for them as they see price increases compared to before. The recent spike in gas prices has only added to their struggles. While we're seeing these lower-income consumers affected, it’s important to note that they make up a relatively small portion of our business. We don’t accept EBT cards and don’t sell perishable items, so our offerings include both discretionary and non-discretionary items, with around 22% to 25% of our business being non-discretionary. We serve a wide demographic in our market. Although we haven't yet noticed a significant trade-down effect, I strongly anticipate that it will hit us soon, especially as consumers face sustained high gas, grocery, and utility costs. I believe it’s imminent and will be evident across the board. We feel well positioned right now, and we expect that the deals we’re seeing will benefit us in the latter half of the year.

And Matt, to answer your question about the guidance, I mean obviously, the comp guidance is right in the sweet spot of our long-term, out of the one to two comp. We're a little more cautious about Q1 just because it seems like it's been such a dynamic environment with all these factors that we're talking now with the consumer right now. To John's point, we're not necessarily seeing that trade-down effect yet, but historically that has happened. And we have great deals. So yeah, I don't think there's anything really for the macro items that are out of our control. We haven't embedded additional conservatism per se in this guidance other than maybe a little bit in Q1.

Great. And then maybe just one follow-up on the expense front, any reinvestments to consider this year or just how best to think about the historical, I think there was 1 to 1.5 comps for leverage as we think about wages and maybe just any puts and takes on the expense front?

Yeah. Matt, this is, Jay. When we look at it, we're expecting a little slight deleverage on our SG&A, call it, 10 or 20 basis points I would say in our plan versus last year. And we have made – in ‘21 we made significant investments at the store level and the DCs, but that's obviously captured in the gross margin on the DC front, but we did make significant investments in the stores, we made investments this year related to the merit increase for the year, but we're not expecting a major step-up in ‘22 like we saw in 21. We will have some additional investments around just some simple things like starting to get the teams together again. So with travel with meeting, so we have a little deleverage from that. We've got a little deleverage from the incentive comp which, obviously, in ’21 wasn't as high as it will be at least in the plan for ’22.

Great. Best of luck.

Thanks, Matt.

Thanks, Matt.

Thank you. Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your question please.

Hey, John and Jay. This is Michael Kessler on behalf of Simeon. Thank you for taking our questions. I wanted to ask about the 2022 guidance in a broader context. If we examine the implied midpoint for EBIT, the compound annual growth rate from using 2018 and 2019 as a reference suggests an annualized growth of about 3 to 3.5%, which seems lower than what you have historically achieved and what we might expect. There have been various influences during that time. As we consider 2022 and beyond, could this potentially be the new baseline level of operating income for the business? Is there a chance for a recovery in growth in 2023 if some of the challenges from 2020 subside? How should we approach 2022 in terms of your business planning and future growth expectations? Thank you.

Yeah. Michael, I think the biggest thing that it’s focused on is the impact of the gross margin, when you look back at 2018 or 2019, this year there is significant pressure in the margin that we discussed in pretty great detail for 2022. We expect that for 2023 we will be back to our long-term algo and back to very, very close to the 40% gross margin. So, the EBIT margin should be back to very close to what historically they've been and the growth should be pretty consistent as well. So this year just contracted a little but because of our gross margin pressure that we have with the supply chain costs that we have to work through the first two, three quarters of this year.

Okay, great. And maybe just a quick follow-up on your last point there, on that 40% gross margin target and goal to get back there. Can you first talk a little bit about, I guess, what are the biggest levers? How you're offsetting the increased transportation and supply chain costs? I know price and we talked about the merchandise margin expansion earlier, how big of a role is that playing versus other mitigation actions? And then just one last one on the pricing that you have taken, any response from the customer as far as the recognition, trading within the store or anything to call out as far as the willingness of the consumer to accept those higher prices?

Let me address the first question, and then I'll turn it over to Eric for the second part. Regarding the price increases in our stores, we have approached this very selectively, ensuring that we remain competitive by comparing our prices with those of our competitors. This allows us to preserve our value proposition. For example, if Walmart raises their prices on a comparable item, we would adjust ours accordingly, but we can still maintain a similar value profile. This is a fundamental aspect of our business strategy, and our merchants monitor it daily to ensure we stay true to it. Now, I'll let Eric discuss some of the nuances related to our margins.

Thank you, John. Michael, you mentioned that one of our main strategies to address the gross margin pressure and import container costs is to take early action. John highlighted in his opening comments that we began negotiating container contracts much earlier this year than usual, several months ahead of schedule. We've made significant progress and are pleased with the support from the carrier community. We have established several important new relationships and have greatly increased our overall capacity at contract rates. In the past quarters, we noted our heavy reliance on the spot market in 2021, where approximately 80% of our import freight was sourced from it. For 2022, we anticipate this will drop to less than 20%, a complete reversal from 2021. While the costs we expect in 2022 are higher than our historical averages, they remain significantly lower than the spot market rates we faced in 2021. We believe these rates align well with our expectations for the market next year. The reason you might notice more benefits in the second half of the year is that our contract year begins in Q2, specifically in May. Thus, we will start experiencing advantages in Q3 and fully realize the benefits of the new contract rates by Q4.

All right, thank you. Thanks guys.

Thanks, Michael.

Thank you. Our next question comes from the line of Scot Ciccarelli from Truist Securities. Your question please.

Hey guys, it sounds like you guys were obviously negatively surprised by the magnitude of supply chain issues throughout the year. John, you double down on that idea with your comments about the difficulty in flowing goods. I think Eric was just talking about kind of the change from spot to contract rate. But can you guys provide any other specific examples as to why the supply chain issues won't be as substantial in ‘22 at least once we get past the first quarter here?

Let me provide some insights, Scot. Eric may want to add some details, but regarding our improved outlook compared to last year, it boils down to our significant investments in our distribution center network. We've implemented numerous changes and brought in a new Head of Distribution Center who we believe is better suited to lead and grow with the company. The key point is that we've also invested heavily in labor to achieve the necessary headcount and enhanced processes to improve efficiency in our centers, which remains a priority for us. We feel positively about our current position. While distribution center operations are important, we also faced challenges with timely import freight delivery and managing the subsequent inefficiencies caused by late arrivals. Now that we have addressed those issues, we're confident in our situation. We performed well in Q4 and, as I mentioned earlier, we are well-prepared for the spring selling season, focusing on the early movement of import containers. We've successfully streamlined our processes and learned valuable lessons from last year’s challenges, enabling us to avoid similar pitfalls. Additionally, the contract discussions Eric mentioned earlier are crucial to securing the right commitments for timely container shipments.

Yeah. I think Scott, John did a great job, particularly in some of the details here. And I would just say, when I answered Michael's question, I was more focused on the cost implications of these contracts, but the capacity benefits are huge for us. We certainly scrambled and worked very quickly in Q2 moving into Q3 of last year to make sure we secured capacity, but the capacity secured is at spot market rates. Now we have contracted capacity at more favorable rates. So that capacity means that we can flow our goods more fluidly when we need them, which helps with throughput in our distribution centers as well because we don't get the logjam of goods arriving kind of out of cycle when we're supposed to get those goods and having to deal with kind of the spikes of being down associated with that. Just I guess I'll just really quickly add on the distribution side and John touched on this. We did invest in people, including leadership in many different important positions in our organization, we invested in people from a wage standpoint, we've made numerous process improvements over the course of the last nine or 10 months, including investing in our systems, on the IT side and making adjustments to parameters and making adjustments to systems and handheld devices we've talked about in previous calls. And just final note is, we continue to invest in material handling equipment of buildings. Our primary focus has been in the commerce facility. So we're continuing those investments to help that building with throughput, with speed, with efficiency and the York extension is also a reflection of getting both capacity to service more stores out of that building and more throughput to service spikes in demand.

Got it. Okay, thanks a lot guys.

Thanks, Scott.

Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo. Your question please.

Hi guys, good afternoon. I'm curious about the inventory situation. It appears that you ended the year with inventory per store significantly higher than in 2019. Could you provide more details on this? I'm wondering how much of this increase is due to carrying over product from the holiday season that arrived late, compared to just higher acquisition costs. John, how do you view the current inventory levels in terms of what you would like them to be as we start considering sales and the quality of available products in the upcoming months?

Ed, I'll take part of it and let Jay give you the technicalities. With regards to the overall inventories, the inventories are actually inflated over 2019, 2018, 2020 whatever years you want to look at, just because of the increased supply chain costs that are caught up in the cost of the product. So I would tell you the actual in-store inventory over 2019 would not be higher in the stores. So that would be not a right number, because we were actually a lot higher in ’19 than I would have liked to see ourselves, but there is obviously the inflationary pressures on the product. So there's some of that embedded in the numbers that we have at the end of 2021. But overall, I would expect that we would see increased inventory levels compared to ‘21 in the first half of the year be pretty significant with the increased supply chain costs rolling out eventually after the first half of the year and then just the inflationary pressure of the goods. I would expect you to probably see close to 25% increases year-over-year and then moderating to about store growth in the back half of 2022, but the overall inventory position we feel really, really strong where we're sitting, and obviously, like I said, the deal flow is a byproduct of that as well.

Okay. And then the other thing I wanted to ask you about is on the flyer side, can you just talk about how the issues that you've had at supply chain have impacted the product that you've been able to put into the flyer? And I guess, potentially, how that also may play some role in store traffic?

Certainly. Ed, this has proven to be a more significant challenge than expected. The lead time from preparing the flyer to having products available in the distribution centers is crucial for our merchants to effectively market the items they have procured, ensuring continuity and confidence in product availability. This situation caused difficulties in the latter half of last year, as we struggled not with a lack of products but with a lack of consistency across our operations to compile the flyer and the timely receipt of seasonal products. If these items weren’t available in time, we couldn't include them in the promotion. This naturally led to challenges in 2021, but we expect to resolve these issues in 2022. We aim to return to a regular schedule once our merchants can confidently assemble ads, knowing exactly when products will be available in stores. This is a critical aspect of our operations and essential for our future confidence.

Great, thank you.

Thanks, Ed.

Thank you. Our next question comes from the line of Randy Konik from Jefferies. Your question please.

Hi, this is (ph) on for Randy Konik. Thanks for taking our questions. First, on customer acquisition efforts, can you maybe highlight some of these recent efforts to enhance new customer acquisition? And then how has retail customer traffic conversion been to Ollie's Army?

Sure, Corey. Regarding our digital transformation at Ollie's, we recognize the need to adapt beyond traditional print strategies in response to global changes. We've introduced several effective strategies, such as using Stitcher Ads on Facebook and Instagram, which have proven powerful, along with Google local and Cardlytics software. These are currently our key digital initiatives. In 2022, we plan to test TikTok, YouTube, Pinterest, and collaborate with influencers in areas beneficial to Ollie's. While print remains vital to our operations and we are committed to it, we also acknowledge the evolving preferences of our customers and the necessity to embrace digital avenues. Although there has been a slight decrease in print efforts as we invest more in digital, we aim to serve both our longstanding customer base and new customers effectively.

Right. And then on the retail traffic conversion to Ollie's Army?

We're performing well in conversion compared to previous years, so we're seeing better results at the point of sale than we have in any prior year.

Great, thanks very much. And then just a follow-up on deal flow. I believe you mentioned strength in health and beauty, automotive, and pets, are there any categories that have been a little bit more difficult?

As of most recent Corey, I would say and some of this is just timing of deal flows and how deals come about. But I would tell you, in some areas in our food category has been a little tighter than we'd like to see it. Food and the timing of some of our candy deals have been a little tighter this year that we would like to see from that perspective, but we're working on some other value programs to try to augment any pressure that we have with these two categories, but other than that it's been pretty free flowing and pretty powerful.

Understood. Thank you very much and best of luck.

Thanks, Corey.

Thank you. Our next question comes from the line of Jeremy Hanlon from Craig-Hallum Capital. Your question please.

Thanks for taking the questions. I wanted to start first with the store openings and understanding better the expectations around the cadence of your openings through the course of the year kind of starting with Q1 first half and moving into the back half of the year?

Yeah. Jeremy, this is Jay. And we talk about the openings by quarter in the prepared remarks.

Can you just refresh because I didn't capture all of them?

We are planning to open eight stores in the first quarter, 12 in the second quarter, 17 in the third quarter, and between nine and 11 in the fourth quarter.

Okay, great. Thank you. And then just coming back to the gross margin for a second, so I think back in December, you were looking at Q1 gross margins in the like 35 flat range; it looks like you're expecting a little bit better than that now at 35.8. But in terms of thinking about the rest of the year, I think it sounds like you're expecting it back to be kind of 39% plus by Q4, is there going to be similar type of year-over-year decline in Q2? And then I guess a significant improvement by Q3, but still down year-over-year. Any color that you could share there would be helpful.

Yeah. So we are expecting the year-over-year decline in gross margin in Q1 and Q2 to be consistent. We expect some sequential improvement in Q3, so maybe it's about half of that, and then we get back to normal in Q4.

Got it. And then the last one from me on the labor side, in terms of wage pressure that's out there, but not just wage pressure also retention of employees. Can you provide some color on the turnover you've seen, kind of the year-over-year hourly wage cost increase and whether or not you feel like you need to take it even higher the rest of the year or what's embedded within your plan? Thanks.

Yes, Jeremy, this is John. Regarding the hourly employees at the store level, they tend to be quite transient. We're making some adjustments in how we think about part-time and full-time positions. As for our hourly investment, we evaluate it on a market-by-market basis rather than implementing a broad change. Last year, we invested significantly in certain markets where it was needed, but we don't apply a one-size-fits-all approach. We react every time that something happens. So we don't expect any major shifts this year in incremental pay at store level, and we don't have anything like that baked into our plans. We have what I say a moderate increase, and we've done a lot of changes already in 2021 that we're carrying through in 2022, and we're working on increasing efficiency in the stores as well as the DCs to be able to pay for some of that, but that's what we're looking at, and the turnover is not much different than the ROE associate level that it has been historically from our perspective. Little bit harder to find people to work now, whether it be for unemployment as people are out of the market, but I think that's going to be changed here as well.

Great. Thanks for the color. Best wishes.

Thank you.

Thank you. Our next question comes from the line of Paul Lashway from Citi. Your question please.

Hey guys. Can you talk about what percent of your sales are currently on closeout product? How does that look in ‘21 versus ’19? And just how you're thinking about that for 2022 and beyond? And then kind of a similar question in terms of the percent of your goods that are imported. What does that look like in ‘21 versus ’19 and how are you thinking about it in ’22? Thanks.

Yeah. Paul, with regards to our closeouts in ‘21 versus our closeouts in 2019, we were at about a 60% closeout rate in 2021. 2019 was probably close to 70%, which will be closer to our historical average that we as a company strive to be at. I would tell you, in 2022, we're going to do everything in our power to be at 70% closeout because that's what makes us model special. I think there's going to be a big opportunity in that area, so somewhere between 65% and 70% in 2022 is what I would project from a closeout perspective. Don't expect a big change in our import component that work on. I think our imports come in at about 18% of our overall business. Love to see imports down to 10%, but I'm sure that won't be able to happen, but we'll be pretty consistent in our overall metrics in terms of the breakdown of our product now we move it.

Got it. And then just a follow-up. I'm sorry if I missed it, but as you think about your comp expectations for the rest of the year beyond 1Q, how are you thinking about it from a traffic versus ticket perspective? How much does pricing play a role in the comps that you expect to achieve in quarters two through four? Thanks.

Yeah, I think Paul, we don't look at the transaction versus the ticket; we look at the value and the deal, what motivates the consumer to come in the store. So it's the strength of our deals, and I think obviously another piece that we've talked about is our ability to get our product in the stores, on a timely basis in the seasons that we need to have meant to be able to motivate the consumer. So that's a big piece that will be a driver to our business, but it's really what drives the customers, the value that we give to them and the deals we get to them. So being in late to holiday with your toys and late to holiday with your seasonal doesn't help your business, and obviously when that's late, something else gets substituted for it and sits behind, it doesn't get into the store as well. So with us being able to get our throughput levels today and get everything to stores timely, that's going to be the benefit we're going to be able to bring to the bottom line.

Okay, thanks. Good luck.

Thank you. Our next question comes from the line of Brian McNamara from Berenberg Capital Markets. Your question please.

Thanks for taking my question. So having 80% of your import freight in the spot market in ‘21 slip to less than 20% in 2022. I'm curious, is that a permanent change away from your previous opportunistic approach? Are you simply adapting temporarily to some shorter-term supply-demand dynamics? And if so, what's the risk that you're contracting at a potentially opportune time as capacity comes back online and regions and such normalize?

I think that the broader answer to your question is, I don't know. We really don't know what this year is going to bring or what future years are going to bring. It's a super dynamic market out there. We're doing some things to somewhat hedge our bet on this leaving enough volume out there for spot market to be opportunistic a little bit of flexibility around kind of how we're writing our contracts as well. So, no, I'm not really sure. I know that there were some companies out there doing multi-multiple multi-year deals; we resisted that and said we're going to contract just for the one year and it will see what happens. The question about long-term with this thing is going to look like. I'm not sure; I think we're going to have to navigate the market over the next two to three years to kind of see where things land. I would expect if they're closer to kind of normal that we would want a fairly large percentage of our trade to be under contract in a normal year. And that you're mitigating risk by having more freight under contract and if rates are moving in a significant way up and down. It's just a better position to be in, but we're flexible and I'm not sure that the model that we were all used to for many, many, many years until the pandemic happened is going to work in the future.

Got it. And just a quick follow-up, in your big four pandemic quarters from Q2 ‘20 to Q1 ’21, I think you are recruited about $1.4 million Army members. Can you speak to the engagement of the specific numbers? Are they still engaged? Are there spending frequency trends better, worse or in line with the rest of the Army? Thank you.

We're seeing good engagement and retention from our customers. By good, I mean it's similar to the engagement we've seen in previous years. Our retention rates are satisfactory. In terms of overall spending, it remains consistent compared to prior years, perhaps slightly better for non-Ollie's Army members than in the past, but overall I consider it to be pretty stable. We are pleased with the behavior of these customers based on what we've observed so far.

Thank you. Our next question comes from the line of Mark Carden from UBS. Your question please.

Good afternoon. Thanks a lot for taking my questions. So first a quick follow-up on the store remodel program. There's obviously a lot of moving pieces right now with the supply chain and macro backdrop. Just given all the noise, what jumps out to you though needing to decide that this is not the right time to start the program?

I believe that over the next six to nine months, we have a clear opportunity to update our stores significantly. This opportunity is substantial enough that we should start gaining experience as soon as we can. It won't strain our supply chain since we are simply rearranging products already in the store and adjusting certain categories as we expand and contract others. So, there is no net impact on the supply chain at all, particularly where the business has faced the most stress. We are very excited when we visit some of our older stores from the '80s and '90s and realize they don’t align with our current vision for how we want to present ourselves to customers. There’s no better time than now to start learning and making these changes.

Fair enough. That makes sense and that's helpful. And then just as a follow-up, how much of an impact did Omicron have on your supply chain?

It was not a major issue, but it felt challenging at the time. To provide some details, our Pennsylvania distribution center was most affected, and the impact lasted about 10 days, which was quite significant in terms of our cost rate. It seemed longer than 10 days, but it was indeed around that time. We were also in the process of taking inventories in all three buildings, which added some additional pressure. However, it was a relatively brief period of difficulty, and we managed through it. The impact we experienced occurred in early to mid-January, which is the low point of the season, so that was a factor in our favor. If the Omicron variant had surfaced in November, the situation could have been different, but ultimately, the impact on the quarter was minimal.

Got it. Thanks so much and best of luck.

Thanks, Mark.

Thank you. This does conclude the question-and-answer session of today's program. I would like to hand the program back to John Swygert for any further remarks.

Thank you everyone for participating in today's call and continued support. We look forward to updating you on our first-quarter results in our next earnings call. Stay safe. Thank you.

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day.