Ollie's Bargain Outlet Holdings, Inc. (OLLI) Q1 2024 Earnings Call Transcript

Good morning, and welcome to Ollie's Bargain Outlet's Conference Call to discuss financial results for the First Quarter of Fiscal Year 2024. Currently, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and interactive instruction will follow at that time. Please be advised that this call is being recorded and 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, Chief Executive Officer; Eric van der Valk, President; and Robert Helm, Executive Vice President, and Chief Financial Officer. Certain comments made today may constitute forward-looking statements made pursuant to and within the meaning of the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our annual report on Form 10-K and quarterly reports on Form 10-Q on file with the SEC and the earnings press release. Forward-looking statements made today are as of the date of this call and we do not undertake any obligation to update these statements. On today's call, the company will also be referring to certain non-GAAP financial measures. Reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings press release. With that said, I will now turn the call over to Mr. Swygert. Please go ahead, sir.

Thank you, and good morning, everyone. We appreciate you joining our call today. We are extremely pleased with our performance this quarter. Our team has executed at a very high level, offering amazing deals to our customers, delivering consistent financial results and investing in our future. Our first-quarter comparable store sales, total revenue, gross margin, and expenses were all better than expected, and this resulted in a 49% increase in adjusted earnings per share. Consumers clearly remain under pressure and are seeking value when making their purchases. Our unique business model is delivering exceptional value on branded merchandise that our customers want and need at prices 20% to 70% below the fancy stores. Everyone loves a bargain, and 'bargain' is our middle name. There are a few important things propelling our business that we wanted to touch on today. The first is the growth in the closeout industry. Large consumer retailers supplied by large product manufacturers are constantly introducing new products and packaging, and this is leading to growth in the closeout industry. The second is our increasing size and scale. While the closeout industry is growing, the number of bigger players buying and selling closeouts today is shrinking. Operating a closeout retailer is not for the faint of heart. Over the years, there have been several failures because they were not set up properly. We are, by far, the largest buyer of closeout products, and this has been our only business for almost 42 years. Nobody has our know-how, size, and scale or credibility in the closeout market. As a result, our purchasing power is growing, and we are becoming more meaningful to our vendor partners. The third driving theme is the investments we have made back into our business to drive execution, productivity, and growth. This is an area that we probably don't talk about enough. While it is the great deals and product offerings that will always be key to driving our business, it's investments in our people, supply chain, stores, marketing, and systems that enhance our execution, propel our margins, and position us for continued long-term success and profitable growth. On that topic, I would like to discuss two recent announcements. The first is a purchase agreement for a group of 99 Cents Only Stores. Eric will provide more details on this in a moment, but we are very excited about these stores. They have attractive rents, longer lease terms, demographics that align nicely with our core customer and are located in key markets across Texas, where we have a meaningful growth opportunity. I spoke earlier to the shrinking number of closeout players, and the 99 Cents Only bankruptcy filing and store closures is further validation of this. The second piece of news supporting our long-term growth and success is a number of executive promotions and appointments as part of a rigorous succession planning process conducted by our Board of Directors. I have been with the company for over 20 years and enjoyed every minute, but it's my desire to step up to the Executive Chairman role and pass the CEO baton on to Eric in early 2025. Since joining Ollie's, Eric has played a pivotal role in the company's growth and success. He has transformed key areas of the business, including supply chain, store operations, and store design, all of which resulted in improved execution and operating efficiencies. This, combined with his closeout merchandise experience, makes him the ideal person for his new role. Effective today, I am proud to announce that he has been promoted to President. Also effective today, Rob Helm has been promoted to Executive Vice President and will take on the added responsibilities of managing real estate. Both Eric and Rob have strengthened our leadership team, and the promotions are well-deserved. I look forward to working with them for years to come. Finally, we announced today the hiring of Chris Zender to the role of Executive Vice President and Chief Operating Officer effective June 17. Chris brings a vast wealth of operational and leadership experience from a number of deep discount and closeout retailers. We have a great team, and I will work with them to ensure a smooth transition early next year. The business is in a very good place, and we are well-positioned to keep winning into the future. Now it is my pleasure to turn the call over to Eric.

Thanks, John. I appreciate the confidence you and the board have in me to lead our company into its next phase of growth. John alluded to this, but we really outperformed on every level in the first quarter. Our results are a function of the strong deal flow and execution of our team. The process improvements and investments we have made in our people, supply chain, stores, and marketing continue to pay off in the form of better productivity and consistent financial results. These investments include wages across both our distribution network and our stores. Enhanced operational teams across major functional areas such as marketing, real estate, loss prevention, and supply chain, upgraded distribution and transportation capabilities, new technology and systems, a store remodel program, and a retooled marketing strategy with expanded digital capabilities. These and other investments have also made us a more nimble organization, capable of handling unplanned events and circumstances such as the collapse of the Baltimore bridge. Within hours of this event, we took action to reroute ocean containers to alternate ports, which resulted in minimal delays, disruptions, or incremental costs. This was only possible because of the upgraded team, new systems, and new carrier contracts that we put in place a few years ago to provide increased visibility and flexibility around international freight. As a reminder, almost 90% of our foreign shipping requirements are covered under contract, and we have very little exposure to the spot market. In May, we negotiated our annual international carrier contracts at favorable rates. I am also pleased to report that our new distribution center in Princeton, Illinois has begun receiving product and is on track to start shipping stores in late July. The construction of the building, installation of our racking and automation solutions, and staffing of the new facility is going as planned and within budget. This fourth distribution center will have the capacity to support an additional 150 to 175 stores. This will give us the ability to service up to 750 stores. We are excited about the recently acquired 99 Cents Only Stores. As John mentioned, this is a group of 11 stores located in key markets in Texas; three are owned properties and the balance are leases. These stores are the right size, located in good trade areas, have attractive occupancy costs, and have been servicing value-oriented customers for many years. Texas is a great market for us where we have tremendous growth opportunity. It's hard to find good locations with the type of rent structures that we typically require, and these stores will significantly strengthen our presence in key markets across the state. On the marketing front, we continue to shift advertising dollars into various digital and social media platforms, including influencers across TikTok, Instagram, and Facebook. This is helping us reach new and younger customers and keeping our brand top of mind with existing customers. Our growing customer base is reflected in our Ollie's Army numbers. Consistent with prior trends, we are seeing growth in the younger customer demographic and also in younger customers joining the Army. Lastly, we continue to benefit from the trade-down effect we have experienced over the last few quarters and are seeing strong retention from this customer cohort. Before I turn the call over to Rob, I would like to thank the entire Ollie's team for their continued support and confidence in my leadership of this amazing business. I am honored to be named President and look forward to working with John and the executive team on the CEO transition. We are a super unique organization that is rooted in great people, experience, and an amazing culture. Rob?

Thanks, Eric, and good morning, everyone. We are very pleased with our strong start to the year. Our first-quarter results came in ahead of our expectations across the board, driven by strong comparable store sales, significant gross margin expansion, continued discipline, and higher interest income. In the first quarter, net sales increased 11% to $509 million, driven by new store growth and a 3% increase in our comparable store sales. Transactions, basket, and average retail were all up in the quarter, with basket being the biggest driver of the comp. The 53rd week last year and the shift in the Easter holiday this year created some movement in our ad calendar year-over-year, which made for some choppy weekly comparisons. Barring these shifts, our underlying comp trends were strong and accelerated as we moved through the quarter. Our category strength was broad-based with over 50% of our product categories comping positive. Our best-performing categories were lawn and garden, housewares, food, sporting goods, and candy. Ollie's Army membership increased 7% to 14.2 million members, and sales to our members represented over 80% of total sales. During the quarter, we opened four new stores, ending with 516 stores in 30 states, an increase of 8% year-over-year. We are pleased with the performance of our new stores, which continue to perform in line with our expectations. Gross margin increased 220 basis points to 41.1%, primarily due to favorable supply chain costs and higher merchandise margins. SG&A expenses were well controlled in the quarter and decreased 40 basis points as a percentage of net sales to 28%, driven by leverage of fixed expenses on the increase in comparable store sales. Operating income increased 47% to $56 million, and operating margin increased 270 basis points to 11.1% in the quarter. Adjusted net income increased 47% to $45 million, adjusted earnings per share increased 49% to $0.73. Lastly, adjusted EBITDA increased 40% to $69 million, and adjusted EBITDA margin increased 280 basis points to 13.6% for the quarter. Turning to the balance sheet. Our balance sheet remains very strong and is a significant strategic asset, which provides us maximum flexibility to drive growth and maximize shareholder returns. We ended the quarter with $342 million between cash on hand and short-term investments and no outstanding borrowings under our revolving credit facility. Inventories increased 6% to $527 million, primarily driven by new store growth. Capital expenditures totaled $27 million for the quarter and were primarily related to our new distribution center in Princeton, Illinois, the remodeling of existing stores, and the development of new stores. We are committed to returning capital to our investors through share repurchases while balancing our strategic growth opportunities and working capital needs. With some of the share price volatility in the quarter, we stepped up our repurchase activity and bought $25 million of our common stock. Turning to our outlook for 2024. We are pleased with our strong start to the year and are raising both our sales and earnings outlook for fiscal 2024. For the full year, which is a 52-week year compared to 53 weeks in 2023, we now expect total net sales of $2.257 billion to $2.277 billion, comparable store sales growth of 1.5% to 2.3%, gross margin of approximately 40%. Operating income of $250 million to $258 million, adjusted net income of $196 million to $202 million and adjusted net income per diluted share of $3.18 to $3.28, which assumes an annual effective tax rate of 25.5%, which excludes the tax benefits related to stock-based compensation and diluted weighted average shares outstanding of approximately 62 million. Lastly, let me provide color on how we're thinking about the quarterly comp and store opening cadence as well as a few other numbers to help with your models. For Q2, we are planning comps around the midpoint of our long-term algo of 1% to 2%. Although, we are currently running ahead of this, July represents a very challenging monthly comparison for us. For Q3, we anticipate comp sales to be flat due to a shift of one flyer from Q3 into Q4. As a result of the shift, we'd expect Q4 comps to be slightly above the high end of our long-term algo. For new store openings, we're still targeting a total of 50 new stores, fewer two closures that we chose not to renew. As Eric discussed in his remarks, we are very excited to be the winning bidder of 11, 99 Cents Only Stores. Since we will start to incur occupancy expenses on these locations at closing, our goal is to open these stores as fast as possible. With these new stores, we will likely push a handful of our original planned openings from 2024 into early 2025. Over the course of the next 18 months, we now expect to open a higher number of stores than originally planned. In addition, the shift of a few stores into early next year also means that the opening cadence will be more front-end loaded next year, which should benefit both full-year sales and earnings. We're still working through some of this in real time, but we're now modeling approximately six new store openings in the second quarter, 30 in the third quarter, and 10 early in the fourth quarter. While we haven't yet taken physical possession of these stores to complete a thorough assessment, we'd expect the remodeling cost of a 99 Cents Only store to be a little higher than a typical opening. With that in place, we would expect capital expenditures to be approximately $90 million, which excludes the $14.6 million purchase price for these locations, and preopening expenses to be in the range of approximately $17 million for the year. In terms of gross margin, our first quarter was our easiest comparison for the year. As a result, we would expect the increases in second and third quarters to be much more modest and the fourth quarter to be down slightly. Keep in mind that gross margins in 2Q and 4Q are historically lower than 1Q and 3Q. We are planning for depreciation and amortization expense of approximately $42 million, which includes $11 million that runs through cost of goods sold. Lastly, we expect net interest income of approximately $14 million. We are now modeling the consensus view of one rate decrease in the back half of the year, instead of the three decreases contemplated in our original guidance. Now let me turn the call back over to John.

Thanks, Rob. We operate a very unique business model that involves everyone from every level to make us successful. I am very proud of the entire team for their hard work and dedication. We love saving customers money and selling good stuff cheap, and it's this passion that brings all of us together and drives the Ollie's culture. It has been a privilege to be part of Ollie's expansion over the last 20 years and to watch this grow from $100 million in sales to over $2 billion in sales. We have so much more growth ahead of us. In many ways, we are just getting started. We are Ollie's. That concludes our prepared remarks, and we are now happy to take questions.

Our first question comes from Brad Thomas from KeyBanc Capital Markets. Please go ahead with your question.

Hi. Good morning, and congratulations to everyone on the new opportunities ahead.

Thanks, Brad.

Sure, John. My question was really, if you could comment a little bit more on the health of the consumer and your outlook over the next few quarters as you're up against these tough comparisons. We're certainly seeing some mixed data points in terms of consumer spending. Any more color around how you're feeling in your medium-term outlook would be helpful? Thanks.

Sure. Brad, this is Eric. What we're seeing in Q1 is pretty similar to Q4. We're continuing to see a trade-down of higher-income consumers, the sweet spot looks to still be the $100,000 to $150,000 household income range. Our lower-income cohort is relatively stable. Keep in mind that we're under-penetrated in lower-income consumers compared to others, but it's been relatively stable. So we're pretty consistent quarter-over-quarter. We're not seeing much change.

I think the only thing I'd add to that is with consumers being stretched, value is going to win. The best value you can offer to customers is to attract more people to our stores, and we're well-positioned for that.

That's helpful. And as a follow-up, John, I was wondering if you could talk a little bit more about how your conversations are going with suppliers as you discuss potentially having more strategic partnerships with them rather than just doing closeouts, and how do you think about that opportunity longer term?

Yeah. We really focus on driving relationships, Brad. We don't try to drive made for Ollie's per se and have everyday value goods. So, at the end of the day, we don't know what will happen. But with our size and scale, we believe that some of this is occurring naturally, but the biggest way to continue to garner the best product offerings available is by keeping those relationships strong with the vendors we are doing business with.

Yeah. Another way to say that, Brad, is that strategic partnerships are closeout partnerships.

Absolutely. Thanks so much and congratulations again.

Thanks, Brad.

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

Hi. Thanks. Good morning. Congrats to everyone on the promotions. For the full year guide, are you raising the rest of the year? It looks like, with Rob, you kind of maintained your quarterly cadence, but it does seem to hit the midpoint of the comp guide that the numbers might be a little bit above what you were thinking a couple of months ago?

From a guidance perspective, we are keeping our comp guidance in place, but we were able to pick up quite a few sales weeks based on the acquisition of 99 Cents Only Stores.

Okay. Maybe just to stick on those stores. Can you give some characteristics around the size of them? I guess just going backwards into history, but there was a history of Toys 'R' Us and opening a lot of stores at once causing some operational difficulties. So if you can just talk about the cadence of opening those and managing the supply of the stores?

Sure, Peter. I'll take it. It's Eric. I think very different from 2019, our supply chain is in a much different place. We have the capacity to ensure that we can get those stores up and running with the right inventory without sacrificing the comp base. We will not sacrifice customer experience or profitability as we move forward on these stores. We have the bandwidth to open them properly and execute.

Yeah, Peter. This is John. The other thing I would add to that is the exact reason why we're not adding any incremental stores to the overall class, if you want to call it. We're going to just springboard into 2025 with many more stores ready to open earlier in the year because we don't want to put too much more pressure on our ability to open the stores.

Yeah. I think, Peter, you also asked a question that I didn't answer on the size. The size of the stores is in the mid-20s, thousands of square feet. As you know, our average for the chain is more like 30. So they're a little smaller than the average. They're the right size for the markets that we're in, considering the stores we are picking up. Perhaps it makes it a little bit easier in terms of the inventory it takes to open them, but not necessarily a material difference.

And Peter, just to remind everybody, back in the day when we did the Toys 'R' Us sites back in 2019, those stores were closer to 40,000 square feet, and we opened 22 of them in one quarter. So that was a little more stress on the network that wasn't quite as sophisticated as it is today.

And we filled the 40,000 feet.

Okay. Very good. Thanks so much and good luck.

Thanks, Peter.

Thanks, Peter.

Thank you. One moment for our next question. Our next question comes from the line of Kate McShane from Goldman Sachs. Please ask.

Hi. Good morning. Thanks for taking our question. We were wondering just how the competitive environment looks right now concerning going after closeout deals? Outside of some of the CPG commentary, where are you seeing some of the more compelling closeout opportunities?

We don't see much competition in the closeout market for most of our deals. It's possible that our size and scale allow us to be the first choice when we want something, and we take it. Currently, we are not experiencing any pressures that suggest we are losing deals to others in the market. We feel well-positioned and can secure all the product offerings in the categories we need, and merchants are in a very favorable position.

Thank you.

Thanks, Kate.

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

Yeah. Hey. Good morning, guys. It's Anthony on for Ed. Thanks for taking our questions. So first, I wanted to ask about the gross margin. It looks like a record for Q1. It came in a lot higher than most for modeling, and obviously, running well above your full year number. Can you just talk a little bit more about what's driving that strength and how we should be thinking about the cadence of the rest of the year in terms of guidance?

This is Rob. I can take this one. We were very pleased with our gross margin result. Most of the expansion was supply chain related, which was what we had forecasted when we came into the year that we get a nice supply chain lift in the first half of this year. We also had some nice merchandise margin improvements and deal flow that we saw in the quarter. But keep in mind, our gross margin in Q1 and Q3 is typically higher than our full year annual gross margin. So we're expecting it to step down sequentially from here. Although, we still expect expansion off of last year's gross margin results. And then from the rest of the year, 3Q will be up slightly, and then 4Q down slightly because, to your point, it was also a record, and we're going to continue to plan conservatively until we get a little bit more short-term visibility.

Got it. That's helpful. And then just on the Q1 comp, I know you guys mentioned some calendar noise in Q1 given the 53rd week. Can you just talk us through the magnitude of that impact in a little more detail? Just trying to understand how clean over that number is?

Well, from a quarter perspective, the quarter had the same number of adds year-over-year. My comments were referencing the week-to-week shifts, which were calendar shifts with our flyer. The weekly fluctuations could be quite significant. But over the course of the quarter, we saw that we did have positive comps in all three months when factoring in for the Easter shift, and we saw that the comp trends strengthened as we moved throughout the quarter as the customer responded to our spring and seasonal offerings later in the quarter.

Understood. Thanks, guys.

Thanks, Anthony.

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

Hey, good morning, guys. This is Joe on for Scott. Thanks for taking my question. I was just wondering if you could talk a little bit more about the line of sight for sourcing this year and where you see the most opportunities across categories.

Yes. Joe, as you know, with our business and being predominantly closeout retailing, we don't have a ton of line of sight per se. We're not out six months or eight months from our perspective. But we have a couple of months, two months, maybe three-month visibility. Right now, our line of sight feels very good where we're positioned. The strength of the deal flow and the momentum we have has been pretty good, and I think it's going to continue to be strong for us. So we feel well positioned going into the second half of the year as well.

Got you. Great. And if I could just do a quick follow-up on how you're thinking about consumers versus general merchandise in terms of demand and sourcing out there would be great. Thanks.

We look at it more on the deal. Obviously, consumables are a big driver right now, given the pressure the consumer is under. But we do give the best deal to consumers. If it's a value the consumer responds, as we have such a wide disparity of income levels in our stores. We are bringing in the right product at the right price. Consumables are definitely a big part of the puzzle right now, and we keep focused on that. However, we are also staying away from really big-ticket items just because that's more challenging to move. So we’re hitting our sweet spot, which we know is working well for the consumer.

Got it. Thanks so much.

Thanks, Joe.

Thank you. Our next question comes from the line of Matthew Boss from JPMorgan. Your question, please.

Thanks and congrats on a nice quarter.

Thanks, Matt.

Thanks, Matt.

So John, could you elaborate on new customer acquisition trends, maybe key initiatives to capture competitive opportunities in the landscape? And then, just in the near term, have you seen any change in consumer behavior so far in the second quarter versus that strengthening in the comps that you cited as the first quarter progressed?

Matt, I'll let Eric take part of that, and then I can kick in at the end.

Yeah. I think in terms of acquisition, Matt, the biggest trend we're seeing is with the younger consumers, the 18 to 45-year-old cohort is where we're seeing the strongest acquisition of new customers. It's very exciting. We do believe that our digital marketing investments and the shift of print investing more into digital is working quite well in attracting that customer. Also, on the product side, bringing in products that appeal to younger customers as the deals present themselves is also very helpful in driving the younger consumer.

I would also say that the boost we're seeing in the customer file is also due to attrition starting to level off. We're seeing that we're repeating customers at greater levels than we have over the last couple of years. If you remember, Matt, we picked up a lot of customers during the pandemic and then faced some operational challenges. We feel like we're coming out the other side of that, and the Ollie's Army file increasing 7% for the quarter is a testament to that.

Yeah. And Matt, lastly, on consumer behavior going into Q2, with us being a little bit better than our expectations, we're not seeing any change in consumer behavior. We’re seeing more favorable weather patterns earlier this year than last year. That’s why we’re holding tight to where we’re sitting.

Great. Best of luck.

Thanks, Matt.

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

Congrats on the momentum and the promotions. I wanted to ask about shrink, as you're still hearing a ton of retail peers that are struggling with shrink control. You identified a subset of stores causing the majority of your shrink. I wanted to get an update because I think the last time you said it's still slightly elevated. Where are you on that front?

Hey, Jeremy. This is Rob. Shrink does remain elevated. It seems like we've hit a bit of a plateau here. We continue to work on it every day. As we take actions and improve one store, another store kind of pops up as we do rolling counts throughout the year. The good news is that it seems to have leveled off, and our guidance contemplates the shrink at this elevated level. We haven't forecasted any improvement yet, as it's a work in progress, and we're focused on it. Hopefully, we will have a more positive update in the future.

Great. And then I just want to come back to the 99 Cents Only Stores. Thinking about the economics of the box, a little bit smaller box, in terms of considering the returns on that, presumably, we might be modeling these at 80% productivity of a full-line Ollie's store. But how do we think about the kind of the EBITDA or four-wall cash generation that you're getting from these stores, given the favorable rent economics?

That's a good question. I'll take this one. From a store pro forma perspective, you're correct. We're modeling these stores to be slightly less productive on the sales line. But with the slight reduction in the sales line comes lower occupancy costs and lower payroll costs. All of that is considered in the math. By the time we get to the bottom line, we anticipate that these stores won't be too far off from an economic perspective compared to what a prototype Ollie's would typically look like. So, we’d expect the economics to be nicely accretive this year.

Great. Thanks for the color and good luck for the rest of the year.

Thanks, Jeremy.

Thanks, Jeremy.

Thank you. Our next question comes from the line of Melanie Nunez from Bank of America. Your question, please.

Hey. Good morning. Thanks for taking my question. I just wanted to see what you're seeing in terms of the promotional landscape across the space and how your buying teams really monitor that and factor that into your buying and pricing strategies?

Yeah, Melanie. We look at pricing every day; that's our paramount measure of success. So promotional pricing has not been a real headwind for us at all to date. But our merchants look at the price in the marketplace every time they buy a deal to base our value for the consumer off of that. If and when someone has a promotional price, we look at it and we'll adjust accordingly when needed. But for the most part, where our gaps are so large, we don't need to make any additional adjustments. However, if it does happen, we make it quickly.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Eric Cohen from Gordon Haskett. Your question, please.

Good morning. Thanks for the question. Great quarter and congrats on all the promotions. I just want to ask on the guidance. You called out the big Q1 beat. How much of that is just flowing through? In other words, I guess, now that you have the 99 Cents Only Stores, you’re going to have dark rent until they open. Could the full-year guidance have been raised even higher if it wasn't for the 99 Cents store acquisitions?

99 Cents will be accretive to this year. While you have the dark rents that you referenced, we're not raising our total store opening count for the year. We do have some level of pre-opening expenses in for non-99 Cents stores that we were going to open instead of these stores. From a net perspective, we believe it's accretive this year because we're picking up sales weeks and advancing our pipeline based on acquiring these stores.

Got it. Historically, 70% of your sales have been from closeouts for the last four years; it's dipped down to 65%, understandably so during 2020 and 2021 with strong demand and less closeout opportunity; it shrunk. Even as the retail environment has stabilized, it has stayed at that 65%. Is that the right way to think about it, the business going forward? Does an increase in that everyday value mix actually make the comps more consistent?

Eric, that's a great question. From our perspective, we've always said that our goal would be to have 100% closeouts, which we know is not possible. So our internal goal is always 70-30 closeout versus everyday value goods. But the reality is, as we continue to expand, it gets harder and harder to have all the closeouts that you need to have the business model operating correctly. We do believe that as we continue to slide up to the 1,000 plus store number, we’ll see that closeout percentage start to dip down a little bit, but we don’t believe anything south of 60 is ever going to happen. So we think 60-40 is probably about as far as we would go on the closeout versus everyday value goods. We’ve been doing this for a long time, and the customer really doesn’t notice the difference in how we mix in everyday value goods with closeouts. But our goal is to stay close to that 70%. Right now, we feel pretty comfortable we can stay there with what we’re seeing in the marketplace.

Thanks a lot.

Thank you.

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

Great. Thanks so much for taking my questions and congrats on the promotions. So to start, I wanted to ask another one on the 99 Cents Only Stores. You guys mentioned they're a bit smaller. How do you think about assorting them? Would you expect to keep a similar closeout, non-closeout mix? Would you expect to trim back in any particular categories? Just want to dig in if there's any differences on that front.

Yeah, Mark. It's Eric. We do think about it quite a bit. It's not a big enough difference for there to be a material change in the mix. But it does adjust our thinking about category mix to an extent. It does not adjust our thinking in terms of closeout mix. Certain categories of business that take up a little bit more space, that are a little bit less productive, will be pulled back on to remix the store to ensure our major categories, the destination categories are featured well in a meaningful way. A couple of other categories that will be respaced and smaller. We've learned a lot in remodeling stores over the past two years as we respaced and relocated categories in terms of what works and doesn't work. That's helped inform us for what mixing a 25,000 square foot store needs to look like.

Got it. Makes sense. You guys have seen a lot of momentum in higher income customers over the past few quarters. At this stage, are your tailwinds in this cohort skewing more towards repeat buyers, or are you still bringing in a lot of new high-end customers into your ecosystem? Thanks.

Yeah. I mean it’s really both. We’re seeing repeat buying from all cohorts, including the higher income consumers, and we continue to acquire higher income customers as well.

Great. Thanks so much and good luck, guys.

Thank you.

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

Good morning, everyone. I have one question, one follow-up. The first question is on gross margins. You mentioned in the first quarter seasonally typically a little bit better. Can you talk about what's imputed in terms of freight and supply chain costs? Have we gotten the peak benefit in the numbers now? What does that flow throughout the rest of the year?

I would say from a gross margin perspective, Q1 would be the peak benefit relative to supply chain costs. We do anticipate 2Q to be less than this, and 3Q to be virtually no benefit on the supply chain side. In 4Q, it would be like-for-like for the most part. We did proceed into the year with a decent amount of caution on our guidance regarding supply chain rates. We're not taking any good news at this point with just the potential for going into the retailers' peak season and some commentary out of the ocean carrier front. We're going to stay cautious and obviously flow through the gross margin if we're able to do better than what we planned.

Okay. And then to follow up, the caution was justified so far. My second question was back to traffic and ticket. I think you said basket and transactions were both positive. In the basket piece, is that the number of items that are being purchased? Or I don't know if there's an average ticket that you can proxy given the changing merchandise?

That's a good one. Basket was about two-thirds of the comp, and transactions were about a third of the comp for the quarter. Much of it was driven by AUR. To your point, it is difficult to look at it in terms of mix. UPC was up ever so slightly.

Thank you.

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

I would like to thank everyone for their time today and interest in Ollie's. We look forward to updating you on our continued progress on our next earnings call. Thank you and 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.