Ollie's Bargain Outlet Holdings, Inc. (OLLI) Q1 2023 Earnings Call Transcript

Good morning, and welcome to Ollie's Bargain Outlet Conference Call to discuss Financial Results for the First Quarter of Fiscal 2023. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and interactive instructions will follow at that time. Please be advised that this call is being recorded, and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie's. Joining us on today's call from Ollie's management are John Swygert, President and Chief Executive Officer; Eric van der Valk, Executive Vice-President and Chief Operating Officer; and Rob Helm, Senior Vice-President and Chief Financial Officer. A press release covering the company's financial results was issued this morning, and a copy of that press release can be found in 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 within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may include, but not be limited to predictions, expectations, or estimates, and actual results could differ materially from those mentioned on today's call. Discussions of future performance, financial outlook, trends, strategy, plans, assumptions, or intentions may also include forward-looking statements. All such items 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 except to the extent required by law, we undertake no obligation to update or revise our forward-looking statements. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected, anticipated, or implied. Although it is not possible to predict or identify all such risks and uncertainties, we encourage investors to read the risk factors described in our most recent annual and periodic reports filed with the Securities and Exchange Commission, as well as our earnings release issued earlier today for a more detailed description of those factors. We will be referring to certain non-GAAP financial measures on today's call that we believe may be important for investors to assess our operating performance. Reconciliation of these most closely comparable GAAP financial measures to non-GAAP financial measures are included in our earnings release. And with that, I'll turn the call over to Mr. Swygert. Please go ahead, sir.

Thank you and good morning, everyone. We had a strong first quarter, and we are pleased with the momentum of our business. Our first quarter results exceeded our expectations and were driven by continued improvements in comparable store sales, new store productivity, and gross margin, all while maintaining strong control of expenses. In the first quarter, comparable store sales increased 4.5%. Total net sales increased 12.9%. Gross margin increased 410 basis points to 38.9%. Adjusted EBITDA increased 88.5% to $49.5 million, and we ended the quarter with over 13.3 million active Ollie's Army members, which accounted for slightly over 80% of our sales. Our comparable store sales growth in the quarter was driven by increased transactions, and we continue to see benefits from a wider customer base that includes more higher-income and younger age shoppers. This marks our fourth consecutive quarter of positive comps. On a product category basis, our sales strength was broad-based, with almost 60% of our departments comping positively. As expected, our Consumables business was very strong in the quarter, while we saw some softness in certain home-related categories. Our top-performing categories were food, candy, health and beauty, lawn and garden, and flooring. We know our customers respond to great deals. In late last year, we began testing changes to our print advertising strategy to reinforce the deal aspect of our business. During the quarter, we reduced the number of featured items to deliver a more focused and powerful merchandise narrative. The more concentrated assortment allowed us to tell a more targeted story around some of the higher-demand deals in categories such as consumables. This helped us plan, execute, and flow our inventory better into our stores. Lastly, the more streamlined advertising made it easier to showcase these items in our stores. All of this reinforced the spectacular deal nature of our business, which we believe motivated customers in the quarter. Since our first store opening more than 40 years ago, our mission has been to sell good stuff cheap. We sell real brands and real bargains that our customers need and want today. This has always been our formula for success, and continues to be our guiding principle. The pandemic created several supply chain challenges, all of which impacted our ability and cost to move products. Things started to improve during the second half of fiscal 2022, and these trends have continued. On the merchandising front, due to supply chain disruptions, manufacturers have brought on new capacity, consumers have shifted their buying patterns, and retailers have excess inventory, leading to a very strong closeout market. Our extensive experience and deep vendor relationships place us in a strong position to capitalize on the current environment. We are built for this and we feel very good about the deals we are seeing in the market today. As you will hear from Eric in a few minutes, we have also made investments to improve execution and productivity levels. We also have started to benefit from meaningful declines in import container rates. Given the strong deal flow and current trends, we are raising our full-year sales and earnings guidance and working our way back to our long-term algorithm of double-digit sales growth, 40% gross margin, and double-digit operating margins. Let me now pass the call over to Eric.

Thanks, John, and good morning, everyone. We operate a very unique business with tremendous growth potential and have a super talented team. Everyone loves a bargain, and at a time when more and more customers need a bargain, we believe we are well positioned to continue growing our market share. We have laid out three strategic priorities that guide our decision-making around our business. The first is to offer the most compelling assortment of deals and values to our customers. The second is to expand our operating margin, and the third is to continue growing our store and customer base. Starting with operating margin, import container rates have come down significantly over the past several months, and we are now approaching pre-pandemic levels. We expect to start realizing additional benefits of new ocean carrier contracts and lower spot market rates as we start selling through new inventory later in the year. We continue to make investments in our business and enhancements to improve execution and productivity levels at our distribution centers and stores. Investments in wages and material handling equipment, as well as process improvement and IT enhancements have resulted in better execution, which we believe is supporting the current momentum of our business. Our third priority is to grow our store and customer base. We opened nine stores and closed one during the quarter, ending with 476 stores in 29 states. While the real estate and construction environment remains challenging, we are still tracking to open 45 stores in fiscal 2023. Our long-term target continues to be more than 1,050 stores with a goal to open 50 to 55 stores annually. In addition to opening new stores, we are also remodeling existing stores. This is something we started last year, and we are pleased with the early results. As part of this program, we are re-merchandising the flow of products, adding a racetrack format to stores, and updating checkouts with impulse purchase queues. Our plans this year call for 30 to 40 remodels, and we've completed 11 to date. We continue to invest in our distribution network to support our store growth. The expansion of our Pennsylvania distribution center is on track to be completed in the second quarter of fiscal 2023. This expansion will enable us to service an additional 50 to 75 stores from this location. We have also broken ground on our fourth distribution center in Illinois. Our newest distribution center will feature more automation, which will improve efficiency, throughput, and reduce operating costs over time. When completed in fiscal 2024, we will have the capacity to service approximately 150 to 175 stores with the ability to expand. In total, our distribution center investments will enable us to support almost 750 stores. Before I turn it over to Rob, I wanted to take a moment to thank all of our teammates for their dedication and hard work. We appreciate all you do each and every day to make Ollie's a great experience for our customers. I will now turn the call over to Rob.

Thanks, Eric, and good morning, everyone. We are pleased to deliver stronger than expected results, both on the top and bottom lines this quarter. Net sales increased 12.9% to $459 million and was driven by a 4.5% increase in comparable store sales, and an 8.4% increase in store count. During the quarter, we opened nine new stores and closed one, ending with 476 stores in 29 states. We are pleased with our early results in these new stores, which outperformed our expectations in the quarter. Gross margin improved 410 basis points to 38.9%, in line with our expectations, driven primarily by favorable supply chain costs, partially offset by lower merchandise margin related to shrink and a higher mix of consumables in the quarter. SG&A expenses as a percentage of net sales decreased 20 basis points to 28.4%, driven primarily by the leverage of fixed expenses on the increase in comparable store sales, partially offset by higher levels of incentive compensation. Operating income increased 125% to $39 million, and operating margin increased 420 basis points to 8.4% in the quarter. Adjusted net income increased 141% to $31 million, and adjusted earnings per share was $0.49, compared to $0.20 in last year's first quarter. Adjusted EBITDA increased 89% to $50 million, and adjusted EBITDA margin increased 430 basis points to 10.8% for the quarter. Turning to the balance sheet, our cash position remains strong with $276 million between cash on hand and short-term investments, and no outstanding borrowings under our revolving credit facility at quarter end. Inventory decreased 4% to $498 million in the quarter. Lower freight costs, combined with a normalization of lead times on our in-transit inventory represented a total decrease of $36 million. Adjusting for these items, our remaining inventory increased approximately 4%. Capital expenditures totaled $19 million in the quarter and were primarily for the development of new stores, the remodeling of existing stores, the expansion of our Pennsylvania distribution center, and the construction of our new distribution center in Illinois. During the quarter, we bought back 216,000 shares of common stock for a total of $12 million. At the end of the quarter, we had $126 million remaining on our current share repurchase authorization. We're committed to returning capital to our investors through share repurchases while balancing our strategic growth opportunities and working capital needs. Turning to our outlook for the full year, given our strong first-quarter results and positive trends in our business, we are raising both our sales and earnings outlook for fiscal 2023. For the full year, which includes the 53rd week, we now expect total net sales of $2.052 billion to $2.067 billion, comparable store sales growth of 2% to 2.8%, the opening of 45 new stores, less one closure, gross margin in the range of 39.1% to 39.3%, operating income of $207 million to $215 million, adjusted net income of $160 million to $165 million, and adjusted net income per diluted share of $2.56 to $2.65. An annual effective tax rate of 25.3%, which excludes the tax benefits related to stock-based compensation, diluted weighted average shares outstanding of approximately $63 million, and capital expenditures of $125 million, including approximately $75 million for the construction of our fourth distribution center and the expansion of our Pennsylvania distribution center. Lastly, let me provide some commentary on our expectations in terms of quarterly flow for the balance of the year. Looking at the new store openings, we now expect to open six new stores in the second quarter and the balance in the back half, with the third quarter having the largest number of openings. Compared to our previous guidance, this reduces second quarter new sales by roughly $6 million. The strength of our comparable store sales has continued into the second quarter, but we recognize consumers are under pressure and are being cautious with discretionary spending. We also faced a more challenging comparison in the second quarter, and cooler temperatures have put slight pressures on certain seasonal items so far. Based on the deal pipeline and the response we are seeing from our customers, we are comfortable with raising our comparable store sales for the second quarter to be in the range of 2% to 3%, up from our initial planned range of 1% to 2%. Our comparable store sales expectation for the back half of the year remains unchanged. Finally, regarding gross margin, our outlook here is really unchanged. We still expect the most significant year-over-year improvement in gross margin to be in the second quarter. We would expect gross margin to follow a more normal seasonal pattern this year, which calls for slightly higher gross margin in the first and third quarters, and slightly lower gross margin in the second and fourth. I will now turn the call back over to John.

Thanks, Rob. I would like to thank our more than 10,500 team members for their incredible hard work and dedication to Ollie's. This really is a unique business that is driven by passionate people that care for one another, and you are always working to help save our customers' money. We know it's a challenging time for many consumers out there, but this is the type of environment we're built for, to deliver great deals for our customers and strong returns for our shareholders. As we say, we are Ollie's. We will now take your questions, operator.

Our first question comes from Peter Keith from Piper Sandler. Please go ahead with your question.

Hi, thank you. Good morning, everyone. So, John, just regarding the closeout environment you described it today as very strong, and even in the past, I think it's one of the best in recent memory. So, what's your best sense today on how long this elevated closeout environment can continue? And then even just looking at this, there is a very strong closeout environment this year and inherently create a tough compare for next year.

Sure, Peter. We've been in this business for nearly 41 years, and closeouts happen every year. Some years are better than others, but we have over 1,000 vendors, so we continue to see deals daily. While a slowdown can make things more challenging for us, it's part of our routine. Our merchants are constantly searching for the best deals around the globe. We believe that the current strength we are experiencing, along with the pressures on our customers, allows us to project trends. As we often mention, our focus is on year-to-year performance rather than quarter-to-quarter. Overall, we feel confident about our position as we scale and strengthen our relationships with these vendors. This makes it easier for us to compare year-over-year performance.

Okay, that sounds good. And secondly, because you did mention shrink had pressured your merchandise margin, maybe you could just give us some context of how you conduct your shrink checks based on inventory and what defensive measures, if any, are you guys putting in place to try to bring that down?

Hey, Peter, this is Rob. We count our stores on a rolling basis, so we count throughout the course of the year based on a preset schedule going into the year. For the fourth quarter, we saw shrink definitely increase, and we saw that kind of spill over into the first quarter. It hasn't gotten any worse, but it hasn't really gotten any better. We are focused on it internally, and it's really our regional staff and loss prevention managers and field operations really getting into stores and conducting investigations and working with the teams closely to mitigate the impact.

And just with the investigations, is it just like everyone else you're seeing elevated shrink externally? Or is it that you are still finding this elevated shrinkage that's internal?

I would say it's both.

I would like to add that our partnerships with local law enforcement have significantly improved. The use of social media in these local markets is also a valuable tool for us in addressing external shrink, so we are definitely on it.

The last thing I would add, Peter, just to wrap it up is, it's not as big a number relative to what some other peers are reporting and other businesses that I've seen.

Okay, very good. Thanks so much and good luck.

Thanks, Peter.

Thank you. One moment for our next question. And our next question comes from the line of Brad Thomas from KeyBanc. Your question please.

Hi, thanks so much for taking my question, and congrats on the nice start to the year here. I was hoping you could just give us a little more color on trends in the quarter and how 2Q has started. Obviously, 2Q is a much more difficult comparison, and many other retailers are talking about the backdrop having slowed, so just curious a little bit more about the rationale behind you all raising your 2Q outlook based on what you're seeing. Thanks.

Sure. So from a quarterly flow for Q1, I would say that February was the strongest month of the quarter. February strength decelerated a little bit into March as I believe it was widely reported tax refunds have been down, and we feel like we saw a little bit of impact beginning part of March. April picked back up with some strong deal flow and content we had in stores, and we've seen strength continue into the month of May.

Okay. And on the remodeling program, I was wondering if you could give us any more color about how the stores that you've initially started with are performing? What kind of lift do you think you may be able to get out of those and the optimism that maybe there are more stores that are candidates for remodels?

Sure, Brad. It's Eric. We're really excited about what we're observing. The feedback from customers has been very positive, and we are pleased with the results so far. It's important to note that we have only a few stores that have completed their anniversary since we initiated this program a little over a year ago. We've remodeled 32 stores up to this point, and we are still in the testing and learning phase, but we anticipate a mid-single-digit sales increase. The capital required isn't substantial; we expect spending between $125,000 and $200,000, with an average payback period of about two years. So far, we are satisfied with our progress. This year, we plan to remodel 30 to 40 additional stores and will keep assessing the outcomes as we proceed. We are likely to commit to a similar number for 2024.

That's great. Thank you very much.

Thanks, Brad.

Thank you. One moment for our next question. And our next question comes from the line of Jason Haas from Bank of America. Your question please.

Hey, good morning, and thanks for taking my questions. So maybe just the first one. I know you called out that you're seeing some higher income, some younger customers are shopping the stores more, which is great to hear. Do you have any sense for which categories they are shopping and what's tracking them down into shopping at Ollie's?

Sure, Jason, it's Eric. We don't track category performance by income cohort. So I don't have a sense for that. But I would probably add just a little bit of color on some of the strongest growth from an income standpoint is our higher income customer, the largest segment of growth is from the $100,000 to $150,000 income range. And we're seeing that there's a tendency towards lower net worth customers with higher income as well. So maybe that's indicative of dwindling savings and more trade down from that customer group. Also, we're seeing stabilization of the lower income customer continue from Q4 into Q2, which is encouraging. We've seen no discernible impact of SNAP benefits with that customer. Remember, we don't take SNAP, but obviously, there's some impact in the economic dynamic of that customer. And also keep in mind lower income customers under index for us.

Thank you. As a follow-up, can you discuss at what point you might consider increasing direct sourcing in relation to your store count? I'm unsure if that remains on your potential roadmap or if you're satisfied with the current closeout mix. In the past, you mentioned that at a certain store size, you could enhance your offerings with more direct sourcing. I'm curious if that strategy is still in place.

Yes, our goal is to have as many closeouts as possible for Ollie's. However, as we grow, we recognize that there may be challenges with maintaining continuity in categories, which might require some adjustments. We've previously mentioned that at around 500 to 600 stores, we might need to make some enhancements. We're close to 500 stores now and we're currently not experiencing any significant issues with sourcing closeouts for our stores. We'll make necessary adjustments when the time comes. Our primary focus is to maintain closeouts in our stores, as that's the foundation of our business. We don't anticipate a major shift even when we reach that point. Currently, around 65% to 70% of our inventory consists of closeouts. It’s likely we might drop to about 60% at full capacity, but I don't believe customers will notice any difference. Also, it's important to note that private label brands do not significantly enhance our margins; closeouts actually share a similar margin profile and sometimes even offer better margins. Thus, our emphasis remains on closeouts, which we are committed to driving.

Got it. It makes sense. Thank you.

Thanks, Jason.

Thank you. One moment for our next question. And our next question comes from the line of Edward Kelly from Wells Fargo. Your question please.

Yes. Hi guys, good morning. I was hoping for a little bit more color on the May comp strength that you're seeing. Just more color around what you're seeing from consumers here, and how do the comparisons look this quarter, sort of like May, June, July? I'm just wondering; do you have this tougher multi-year compare? Is that lying in May? Does that give you confidence to raise the comp guidance or are there tougher comparisons ahead? Just some additional color there would be helpful.

Sure, this is Rob. We're seeing strong comps in Q2 quarter-to-date. Our strong consumable business that we saw in Q1 has spilled over, but we're seeing some weakness in seasonal related categories that are linked to the cooler temps. That's the biggest wildcard going forward. If the weather breaks and it gets hot, we're well-positioned from an inventory perspective to deliver those seasonal businesses. From a comparison perspective, I would say May was the easiest. June ticked up a little bit and July is probably the toughest compare.

Okay. And then in terms of May, is May running in that 2% to 3% range? Or do you anticipate that you'll have a harder compare in July?

Yes, Ed, we're not really going to get into where we're at quarter-to-date, but obviously, it's not our normal mode of operation to increase our comps above our one to two guide. So we feel really good where we are sitting today and we feel we're in a good position to deliver those numbers. We are comfortable with it.

All right. That's clear. Thanks, John. One last follow-up on the gross margin; could you give us a little bit more color around the cadence of how you're thinking about the gross margin for the remainder of the year?

Sure. This is Rob again. So Q2's gross margin expansion is going to clearly be the biggest for the year. I think that last year in the second quarter, we did a 31.7%. So several hundred basis points there. Q3 and Q4 will not be a significant expansion because we didn't have as much of an impact last year. But we do expect to definitely make more progress towards an on algorithm gross margin and to be exiting the year much closer to the on algorithm gross margin than what we entered.

Thanks, Ed.

Thank you. One moment for our next question. And our next question comes from the line of Randy Konik from Jefferies. Your question please.

Thanks, guys. You talked a little bit about investment in wages that's been ongoing. Where do you think we are in that kind of investment cycle? Just on labor rates and where do you think we go from here ahead?

Sure, Randy, it's Eric. I'll answer that. We have made meaningful investments in wages over the last couple of years. We make investments at the local level for individual markets for stores and for our distribution centers as well. We like where we're sitting today. We feel that we're relatively competitive. Our candidate flow has been relatively strong, especially in the distribution centers over the past several months. Our turnover remains high for people who are tenure of less than 90 days. It's a day-to-day local battle to ensure that we remain competitive, and we continue to fight it. It's hard to say what will happen in the next 12 months, but we have built in an assumption of a mid-single digit increase in wages for this year. And so far, that seems to be a reasonable assumption, and we should be okay. I can't really speak to what it may look like in the future. We do continue to work very hard on process improvement and make investments to offset some of this wage pressure that we've been experiencing and will continue to experience.

Yes, that's very helpful. Earlier during the Q&A, you provided some good insights into the remodeling costs being relatively low. Could you remind us about the breakdown of the capital expenditures? I'm trying to understand what a normalized level of capital expenditures looks like, especially since the margins are improving and the cash flow is robust. You've been engaged in stock buybacks, and it seems this cycle of cash generation and share repurchase activity will keep moving forward. Could you share some details on what the capital expenditures look like? Thanks.

Yes, Randy. I'll address the first part of your question regarding remodels, and Rob will cover the second part about total CapEx. For remodels, the CapEx component is typically under 50%. It varies slightly depending on the store's condition, but it remains below 50%. Most of the expenditure focuses on relocating and remerchandising the store, which involves rearranging existing merchandise and fixtures rather than investing in new or replacement fixtures. Go ahead, Rob.

From a CapEx perspective, can you just clarify your question a little bit?

Yes. Your CapEx is projected to be $125 million. Historically, CapEx has been lower, and much of this amount is allocated to distribution centers. I would like to understand how this CapEx is distributed to gain insights into what a normalized run rate CapEx might be in the future, as this will help us assess free cash flow generation, which you are using to repurchase stock.

I would respond slightly differently. I believe that capital expenditures will likely represent about 2% of our free cash flow moving forward, which would be around $50 million. The allocation may vary from year to year between remodels and general corporate expenses, but I would estimate it to remain in the vicinity of 2%.

Understood. Thanks, guys.

Thanks, Randy.

Thank you. One moment for our next question. And our next question comes from the line of Eric Cohen from Gordon Haskett. Your question please.

Hi, thanks, good morning. You guys had a really strong comp this quarter. Just curious why the flow-through might not have been a little bit stronger. And looking at the guidance for the rest of the year, the guidance increase, with comps now 2% to 2.8%, which is above the 1.5%, 2% you would typically leverage expenses at. How come the flow-through, the EBIT margin seems to be in-line with the prior guidance? So how come there is not a better flow-through with the higher top line?

Well, I would say there's two dynamics happening here. And we called out coming into the year that this is going to be a year that we're going to work back towards the long-term algorithm but not necessarily be there yet. The first dynamic is, we do have the higher capitalized costs or the supply chain costs coming off the balance sheet into gross margin. That continues to be a headwind for gross margin for the first half and starts to abate in the second half, like I mentioned earlier. The second piece is a put back of incentive compensation that was reduced last year based on our performance.

One significant point, Eric, is that our operating margins are still projected to remain in double digits, which represents a remarkable improvement compared to the past. While the increase in consumables presents some challenges for our margins, we believe maintaining the guidance of 31 to 39 despite this increase indicates that we are effectively managing the situation.

Makes sense. Like Bed, Bath is closing a whole bunch of stores. And do you guys see opportunity to maybe accelerate store growth and take advantage of some of that real estate? Or does it improve maybe your landlord negotiations and improving the rent costs for you?

Sure, Eric, I'll take that. This is Eric. Typically, for us, I mean any distance in real estate is a good thing for us. Typically, landlords need to sit on real estate for a little while for our type of deal to make sense. So it's not an immediate impact, but we do like this disruption. We like Bed, Bath and several other retailers that are struggling right now because it does make landlords a little bit more anxious, and we're willing to do our deals. But more often than not, let's say, a 12 to 18 month cycle before we see enough inventory of real estate to accelerate in any way. I think your part of your question is, would we consider more than 50 stores or exceeding 55 stores in the future if we were to see additional real estate opportunities? And I guess it remains to be seen. We're committed to the 50 to 55 stores at this moment in time.

Thanks a lot.

Thanks, Eric.

Thank you. One moment for our next question. And our next question comes from the line of Jeremy Hamblin from Craig-Hallum. Your question please.

Thank you, and congratulations on the impressive results. I would like to discuss the performance of different categories. You mentioned that food, candy, health and beauty, and lawn and garden performed well in the first quarter. However, in the second quarter, there has been some negative impact from weather on seasonal products. I'm interested in understanding the contribution from lawn and garden, especially since it's a contrast to many of your competitors who reported it as a negative in the first quarter. Could you provide an estimate or a range for the negative impact you anticipate in Q2 and how it may affect your overall comparable sales?

Sure, Jeremy. First, I'll discuss the performance in the lawn and garden category for Q1. Our experience has differed from many of our competitors because we aren't primarily based on the West Coast. We only extend as far west as Texas, whereas unfavorable weather on the West Coast has affected other companies in this space. I can honestly say we had some fantastic promotions in the lawn and garden category featuring well-known brands that greatly motivated our customers, who responded positively. This has become a key aspect of our business model. We believe our results are comparable, as customers still purchased the brands we offer, aided by solid deals we set up last year for the early lawn and garden season. Looking ahead to Q2, we continue to see strong momentum in our business. However, the cooler-than-average weather has created some challenges, particularly affecting our air conditioning sales. We need warmer temperatures to boost that category. While we know it will eventually warm up, the timing is uncertain. Currently, this has led to some pressure on our overall sales for the quarter. Nonetheless, we're comfortable with our current position and see this as an opportunity for improved performance. We'll keep monitoring the weather to see how it affects results for the quarter.

Thank you for that information. I have a couple of follow-up questions regarding margin impacts. You mentioned that freight is expected to improve, which should positively affect your gross margin. Can you explain the extent of this impact in Q2 and for the rest of the year? Additionally, as you continue to progress with the distribution center in Q2 and the plans for 2024 in Illinois, could you share your thoughts on the expected margin impact from these developments?

Sure. This is Rob. The year-end call, we called out that supply chain costs for last year were in the range of, call it, 13%. This year, our guide implies around 10%. The first quarter was closer to 11%. So if you do the math, we expect sequential improvement throughout the course of the year to be sub-10% exiting the year closer to, say, the 9%, 9.5% range.

And Jeremy, just to clarify, that's primarily loaded towards the second half. We expect to align closely with our long-term algorithm during that period. As Rob mentioned earlier on the call, this is when we anticipate seeing more normalization in both our margins and supply chain costs.

And then the magnitude and kind of the timing and impact of the distribution centers?

Yes, we don't anticipate any impact on the margin from the expansion of the York distribution center. It shouldn't amount to more than a minor adjustment. The opening of distribution center number four, which we aim to have operational by mid-2024, is expected to have a more significant impact likely in the fourth quarter of 2024 and into 2025 as we scale it up, but it won't meaningfully affect 2024. This should not alter our overall annual guidance, potentially adjusting it by about 10 to 20 basis points for the full year, but it won't be a major challenge to navigate through 2024 with the new distribution center.

Thanks for that color, and good luck on the rest of the year.

Thanks, Jeremy.

Thank you. And our next question comes from Matthew Boss from JPMorgan. Please go ahead with your question.

Great. Thanks. So John, could you elaborate on new store performance, what you're seeing from your more recent cohorts? Maybe touch on new unit economics? And just what drove the material acceleration in new store productivity that really stood out this quarter? And maybe just larger picture, could you just elaborate on the white space long-term opportunity? Any changes as you think about new unit growth multiyear?

Sure, Matt, I'll discuss the white space first and then let Rob update you on the new store productivity. Regarding the white space, we’ve mentioned the potential for around 150 stores, yet we're still below 500, currently operating in 29 states. There remains significant opportunity for growth with this model. As you know from your experience with us, this isn't just about comparable sales; it's a growth story, one of the few in the market. We are positioned to expand our store base for many years ahead while delivering solid returns to our shareholders by driving our business forward. The comparable sales are like icing on the cake, but we don't ignore them either. We strive to enhance those sales as we understand their impact on our business. However, our new stores are a crucial and strong element of our successful growth strategy. There's still plenty of white space to explore, and we're enthusiastic about the opportunities that lie ahead.

And from a productivity perspective, we're not doing anything differently. I would say over the last couple of years, productivity has recovered with COVID. We saw that new store productivity dip during the pandemic. The stores that we opened during the first quarter just happened to be great locations. I mean sometimes you hit it out of the park, and we did with some of these stores.

Great. And then maybe just a follow-up, John, could you speak to the macro versus the micro for your top line? And maybe look back historically during times of consumer disruption. I guess as we think about your comps right now, you're clearly bucking the macro trend and the general, I would say, lateral trend, especially across low middle-income consumer. So what are you seeing from customer trade-down maybe relative to customer trade-out as inventory across broader retail does seem like it's moving to a more rational position?

Yes. Matt, this is clearly what we are designed for. Consumers are currently facing significant pressure, and they are turning to value, while we are definitely going against the trend. We discussed this last year towards the end of Q3 and Q4, stating that 2023 should be a great year for us and aligned with our model, and we are witnessing that unfold. What we are experiencing now is really contrary to what many are saying. People are questioning how Ollie's is able to raise Q2 guidance while others are lowering their full-year expectations. This is happening because customers are consistently returning to our model and shopping with us more frequently than before; the offerings in our stores and the deals we are providing are resonating well. I believe this will turn out to be a strong year for Ollie's. While I don’t expect it to mirror our performance in 2009, where we had nearly an 8% comp, we are in a strong position to achieve a solid comp this year. There is still a lot of uncertainty for the latter half, so we are holding our position for now and will adjust as needed.

I think, Matt, I'd just add a comment on the age of our customers, too, is encouraging. We tend to have more customers in the older, more mature age category, 61 and up. Plus trip consolidation is helping drive sales of those customers, potentially cola has some impact on that. And then we're seeing the age cohort of 40 to 55 years old. We're seeing strength in new customer acquisition in that category. So from an age standpoint, it would appear we're also winning.

It's great color. Best of luck.

Thank you. One moment for our next question. And our next question comes from the line of Scot Ciccarelli from Truist. Your question please.

Hi, good morning. This is Joshua Young on for Scott. Could you just talk through the path you guys see to get back to that 40% gross margin level?

Hi. It's Rob, I'll take that. Like I said earlier on the call, a big part of it is gross margin and supply chain costs. The capitalization that we kind of took into the year and the overhang of those costs impact the first half. We expect for that impact to sequentially be in line throughout the year, and the gross margin will be much closer to an on algorithm result. From an SG&A perspective, SG&A, we are seeing wage pressure. We talked about it earlier. It is an impact. I don't think that we get back to an on algorithm SG&A range. So I think that it's a combination of additional sales leverage, some of the process improvements that Eric mentioned in the store that helps us get back to the net bottom line on algorithm for next year and beyond.

Okay. Got it. That’s helpful. Thanks.

Thank you. One moment for our next question. And our next question comes from the line of Mark Carden from UBS. Your question please.

Good morning. Thanks a lot for taking the questions. So to start another one on shrink. Within your gross margin guidance, are you expecting shrink to become any more of a headwind than you were at this point last quarter, perhaps being offset by the tailwinds? And then what do you think has allowed you to really avoid the same degree of headwinds on this front relative to some of your competitors?

This is Rob again. From a shrink perspective, we approached our guidance with caution this year after our Q4 results, so we set it fairly conservatively. We don't expect any further impact beyond what we've communicated. In terms of competition, our shrink represents a smaller portion of our overall gross margin compared to some of our peers in absolute terms. Therefore, even if the situation worsens, it won't deteriorate as much for us since we are starting from a smaller figure.

Makes sense. And then on the higher income and younger shoppers, how has conversion been for these customers to Ollie's Army? And then what steps do you expect to be most impactful for holding on to them longer term?

Yes, I'll take that, Mark. Our acquisition numbers are very strong overall. Acquisition increased by 15% compared to last year. We are seeing significant acquisition in the younger customer group I mentioned, specifically those aged 40 to 55, with particularly strong results in that segment. Additionally, acquisition among higher-income customers is also robust. The acquisition numbers reflect the trends within these customer groups I previously discussed.

Okay. Great. And then just in terms of the conversion to Ollie's Army, that's been more or less in line with what you've been seeing across the store?

The conversion into Ollie's Army, which refers to acquiring new customers, has increased by 15%. If your question pertains to converting to sales, then converting into the Army is indeed a sale, meaning they are essentially the same.

That clarifies it. That's very helpful. Thanks so much.

Yes. Thank you.

Thank you. One moment for our next question. And our next question comes from the line of Simeon Gutman from Morgan Stanley. Your question please.

Thanks. Good morning, guys. Related to new space productivity, we don't see the cohort. Curious on how the relative performance of cohorts look given that the sales per store relative to 2019 is down? And is it entirely explained by some of the newer cohorts weighing that down? Or are some of the older ones still down over that time frame?

Yes, Simeon, we don't go into too many specifics. However, I can tell you that the older cohorts are more productive than the newer ones, as we have mentioned before. Our new stores show strong productivity in their first year, particularly due to the impact of grand openings, and they usually start to compare after the fifteenth month. Typically, they can pull down overall comparisons as they settle into the new baseline. The key point to remember is that 2019 is very different from 2023 for everyone. Our stores are performing exceptionally well, and we are quite excited about the customer feedback we are receiving. All our overall metrics are showing strong results for us. As we pointed out last year, we had a lot of disruptions in 2020, 2021, and even 2022 due to supply chain issues. Now, things are nearly back to normal, and we are beginning to see more typical productivity in our stores and what they are generating.

Got it. And then a quick follow-up. Your best gauge of price? I know it's hard in the business since you're not selling the same items over and over again. But if you were to guess or guesstimate what price in terms of inflation year-over-year, either on an item basis or a basket, how that's impacting the comp?

It's very challenging because we don't carry the same products year after year. As we've mentioned, air conditioners have been slower in sales compared to last year and our expectations. Additionally, air conditioners have a unit sale price that is significantly higher than our average unit sale, making it difficult to assess the situation. There is definitely some inflation in the food category that we're encountering, similar to everyone else, but our inflation rate isn't as high as that of others, which is certainly a factor. However, we haven't quantified how much this is affecting our overall comparable sales due to the difficulty of comparing items available in our stores year-over-year.

Got it. Okay. Thanks. Appreciate it.

Thank you. One moment for our next question. And our next question comes from the line of Paul Lejuez from Citi. Your question please.

Thanks, guys. Can you talk about your pure merchandise margin ex-freight, ex-shrink? Just curious like the deal is getting versus the out-the-door price, how that came in relative to your expectation in Q1 and what your outlook is just directionally for the rest of the year? And then also curious if you changed your interest income; I think it came in a little bit better. Sorry if I missed it, just in your guidance, how that changed? And then how many stores get pushed out from 2Q into the second half?

Yes, Paul, I'll take the merchandise margin. With regards to the components, obviously, the IMU, the markdowns, and the shrink. We don't typically break those out. But our current merchandise margin is sitting close to 50 points, which is elevated from prior years due to the, obviously, the offset of the supply chain cost and also the strength of the closeout market we're sitting in. So that's a very strong number that we are very proud to have.

And from a store push-out perspective, I want to say it was six to seven stores for the second quarter.

And then interest income?

No change.

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

Thank you for your support of Ollie's. We look forward to updating you on our results next quarter. Have a great day.

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