Ollie's Bargain Outlet Q3 2024 Earnings Call Transcript

Quartr
Provided by Quartr
December 6, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to Ollie's Bargain Outlets Conference Call to discuss Financial Results for the Q3 Fiscal 2023. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session and an 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 today, call from Ollie's management are John Swigert, President and Chief Executive Officer Eric VanderVolk, Executive Vice President and Chief Operating Officer and Rob Helm, Senior Vice President and Chief Financial Officer.

Operator

Certain comments made today may constitute forward looking statements and are 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 cause actual results to differ materially from such statements. Those risks and uncertainties are described in our fiscal 2022 Form 10 ks dated March 24, 2023 and fiscal 2023 periodic reports 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.

Operator

Reconciliation of those most closely comparable GAAP Actual 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. Swigert. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. We appreciate you joining our call today. We had Another strong quarter and are pleased with the positive trends in our business. Our 3rd quarter sales and margins came in ahead of our expectations driven by strong deal flow, Lower supply chain costs and continued execution throughout the organization. In the quarter, comparable store sales increased 7%, Net sales increased 14.8 percent to $480,000,000 and adjusted EBITDA increased 29.5 percent to $51,000,000 We also opened a record 23 new stores in the quarter and saw very healthy new store productivity in the period.

Speaker 1

Based on the strength of our Q3 results and current business trends, we are raising our sales and earnings guidance for the full year. The Q3 represents our 6th consecutive quarter of positive comparable store sales growth and we continued to see broad based Strength across numerous categories. In the quarter, over 60% of our product categories comp positive with our top performers being candy, Sporting goods, housewares, food and toys. Our summer seasonal categories such as room air And Summer Furniture also contributed to our strong performance. The closeout deal flow is very strong.

Speaker 1

Consumers remain under pressure and we are looking and are looking for ways to save money on branded merchandise they need and want in their homes. Manufacturers are creating new and innovative products, changing packaging and sizes and competing for retail shelf space, which is all creating more closeout opportunities. We are built for this environment. For over 41 years, Ollie's has been selling brand name products at drastically reduced prices, which are 20% to 70% below traditional retailers. We are a trusted source with both our customers and vendor partners.

Speaker 1

Customers know they can find real brands and real bargains on products they need and use in their lives every day. Our vendors know we are a one stop shop Managing excess inventory and closeouts. With over 500 stores and growing, our size and scale is becoming a real competitive advantage And we are seeing better access to deals across a growing number of categories and vendors. Our deal pipeline remains very strong. Deals drive our business and execution drives our success.

Speaker 1

The pandemic disrupted our execution in many ways And we have spent the last couple of years investing in our people, supply chain, distribution centers, stores and marketing. We are executing better across the business and this is driving productivity gains throughout the organization. Eric will speak to some of these in a moment. Ollie's Army continues to be another bright spot with membership up almost 5% year over year and accounting for over 80% of our sales in the quarter. Our busiest and most exciting night of the year, Ollie's Army Night, is this Sunday, December 10.

Speaker 1

This is our way of saying thank you to our best and most loyal customers and giving them something special. Our stores are loaded with great deals and our teams are ready to welcome our loyal Bargainauts. If you are an Ollie's Army member, we hope to see you there. If not, there is still time to enlist and share in the fun and special savings.

Speaker 2

To wrap it up,

Speaker 1

we are pleased with our Q3 results and the continued momentum in our business. We are executing across the board, buying great deals, Managing our supply chain, opening new stores and controlling our cost. We are well positioned to continue growing and scaling the business and remain confident with our ability to deliver against our long term growth targets of double digit sales growth, 40% gross margin and double digit EBITDA growth. Now let me pass the call over to Eric to discuss our store growth and operating initiatives.

Speaker 2

Thanks, John, and good morning, everyone. Our results this quarter reflect the strength of our deals, the hard work and commitment of our incredibly talented team and our efforts to improve execution across the organization. Process improvements and investments we have made in our people, Supply chain and stores are driving better productivity and execution. The most important pillar of our long term strategy is store growth. In the Q3, we opened 23 stores.

Speaker 2

This is a record number of openings in a quarter for Ollie's. We are also excited to report we surpassed 500 store milestone and expanded into another state, ending the quarter with 5 0 5 stores in 30 states. We have already opened another 5 stores in the 4th quarter, including our first store in Long Island, New York. This puts us at 43 new stores this fiscal year with 2 additional stores planned to open later this quarter. Turning to remodels, our customers deserve an updated shopping experience that better showcases the amazing deals we offer In an organized and easy to navigate store format, we completed 12 stores during the quarter, bringing us to 26 stores through the 1st three quarters.

Speaker 2

We are on track to complete approximately 35 remodels this year. Moving to marketing. We continue to look for innovative ways to enhance and And our marketing efforts. We are pleased with the performance of our Streamline flyer, which we believe better showcases our most compelling deals. During the quarter, we shifted 1 flyer out of the 3rd quarter and into the 4th as planned.

Speaker 2

We continue to broaden our reach and build our brand awareness through other forms of marketing. We executed a campaign around National Bargain Hunting Week, which included a survey as well as a media tour with lifestyle expert and influencer, Lamour Suss. This campaign generated over 500,000,000 impressions. We're continuing to build on our success and have expanded the program to include over 50 influencers. The growth of our social media marketing program Keeps helps keep Ali's message of savings top of mind with existing customers and attracts new customers as well.

Speaker 2

This is helping fuel our growth, especially with the younger customer demographic, which is our fastest growing segment. Our collective marketing efforts led to a nice improvement in Ollie's Army growth this quarter. The customer file increased 4.8% year over year and sales from the Army representing over 80% of our sales. We are encouraged to see that our compelling deals and enhanced marketing programs are attracting younger customers to the Army. We also implemented a military appreciation discount day for all Ollie's Army members who are veterans or active duty military.

Speaker 2

Turning to supply chain. We continue to expand our distribution network to support our growth and are on track to open our 4th distribution Illinois in fiscal 2024. This will provide us the capacity to service an additional 150 to 175 stores as we expand into the Midwest. The expansion of our Pennsylvania distribution center was completed in August and we are seeing immediate benefits in throughput and operating efficiency. These combined investments give us the ability to service between 70750 stores in support of our long term target of 10 50 stores or more.

Speaker 2

Before I turn the call over to Robert, I would like to take a moment to thank our amazing associates who are value obsessed and committed to the successful growth of our company. I am super proud of the excellent teamwork We continue to demonstrate each and every day in the execution of our business. Rob?

Speaker 3

Thanks, Eric, and good morning, everyone. We are very pleased with our Q3 results, which came in ahead of our expectations. We delivered better than expected comp sales and flow through to the bottom line. With the strength of the Q3 and continued momentum in our business, we are raising our sales and earnings guidance for the full year. In the Q3, net sales increased 14.8 percent to $480,000,000 driven by a 7% increase in comparable store sales and new store unit growth.

Speaker 3

Our comp store sales growth was driven primarily by transactions. And as John indicated, Over 60% of our product categories comp positive in the quarter. Ali's Army increased 4.8% to 13,700,000 members And sales to the Army represented over 80% of total sales. During the quarter, we opened 23 new stores ending with 500 was in 30 states, an increase year over year of 9.1%. Our new store productivity was very strong in the quarter And our new stores continue to perform above our expectations across both new and existing markets.

Speaker 3

Gross margin improved 100 basis points to 40.4 compared to last year, primarily driven by favorable supply chain costs, slightly offset by higher shrink and merchandise mix. Gross margin was ahead of our expectations for this quarter and the outperformance was primarily driven by strong deal flow. SG and A expenses as a percentage of net sales leveraged 40 basis points to 29.5 percent driven by the leverage of fixed expenses on the increase in comparable store sales. Even after taking into account the impact of higher incentive compensation costs year over year. Operating income increased 32.3 percent to $39,000,000 And operating margin increased 100 basis points to 8.1 percent in the quarter.

Speaker 3

Adjusted net income increased 37.4 percent to $32,000,000 And adjusted earnings per share was $0.51 compared to $0.37 last year. Adjusted EBITDA Increased 29.5 percent to $51,000,000 and adjusted EBITDA margin increased 120 basis points to 10.6% for the quarter. Turning to the balance sheet. Our cash position remains strong with $264,000,000 between cash on hand and short term investments and no outstanding borrowings under our revolving credit facility. Inventories increased 2% to $532,000,000 primarily driven by new store growth, partially offset by the benefit of lower capitalized freight costs.

Speaker 3

Adjusting for these items, our inventory increased 5%. Capital expenditures totaled $36,000,000 in the quarter and were primarily for the development of new stores, remodeling of existing stores, The completion of the company's distribution center expansion in York, Pennsylvania and the construction of our new distribution center in Illinois. During the quarter, we bought back 143,000 shares of common stock for a total of $11,000,000 At the end of the quarter, we had $98,000,000 remaining on our current Share repurchase authorization, which the Board approved extending to March of 2026. We are 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.

Speaker 3

Based on our strong Q3 results and current trends in the business, we're raising both our sales and earnings outlook for fiscal 2023. We are entering the Q4 with momentum in our business and are confident in our ability to execute. With a lot of business still ahead of us, Including Ollie's Army Night, we believe that we are well positioned to deliver great deals to our customers. We do start to come up against More difficult comparisons in the Q4 and we'll continue to take a measured approach to setting expectations. For the full year, which includes the 53rd week, We now expect total net sales of $2,097,000,000 to $2,104,000,000 Comparable store sales growth of 5.3% to 5.6 percent, the opening of 45 new stores less one closure, Gross margin in the range of 39.2 percent to 39.3 percent operating income of $221,000,000 to 225,000,000 Adjusted net income of $172,000,000 to $176,000,000 and adjusted net income per diluted share of $2.77 to $2.83 An annual effective tax rate of 25.2 percent, which excludes the tax benefits related to stock based compensation Diluted weighted average shares outstanding of approximately $62,000,000 and capital expenditures of approximately 125,000,000 including $75,000,000 for the construction of our 4th distribution center and the expansion of our Pennsylvania distribution center.

Speaker 3

Lastly, Let me provide a few comments on our 4th quarter expectations. We are raising our Q4 comp sales expectation to approximately 3%. This takes into account the shift of 1 flyer into the 4th quarter from the 3rd. We expect to open 7 new stores in the 4th quarter. Although there is one store that is currently scheduled to open in late January that could fall into early February.

Speaker 3

Now let me turn the call back over to John.

Speaker 1

Thanks, Rob. Over the past 41 years, our team has grown to over 12,000 team members who are working harder than ever. The holiday season places extra demands on our team members and I thank them for all their hard work and dedication. It is the combined experience, passion and commitment of the entire team that makes Ollie special. I am grateful for our team and all that you do each and every day.

Speaker 1

As we say, we are.

Speaker 3

All of these.

Speaker 1

That concludes our prepared remarks, and we are now happy to take your questions. Operator?

Operator

And one moment for our first question. Our first question will be coming from Brad Thomas of KeyBanc Capital Markets. Your line is open Brad.

Speaker 4

Hi, good morning and congratulations on the nice quarter here.

Speaker 1

Thanks, Brad.

Speaker 4

John, my absolutely, well deserved. Well, my question is really around, how you're thinking about same store sales for 2024. You've long had the algorithm of sort of a 1% to 2% comp. But if we go back, I think these last two quarters, I mean, they really stand out. You had the pandemic period, you had the K Cup period, if you go back about a decade ago.

Speaker 4

I mean, these will prove to be some tough comparisons next year. How are you thinking at this point about same store sales for next year?

Speaker 1

Yes, Brad, that's a great question. I think obviously we have spent a lot of time here in our public life since 2015. It's really Setting the bar at a 1% to 2% comp on annual basis, this year is definitely outsized, but we executed a lot better this year than we had in the prior 2 years. So I'm pretty confident that for 2024, a 1% to 2% annual guide is where we'll be.

Speaker 4

That's great. And then as a follow-up around margins, You've talked about getting back to that 40% gross margin hopefully next year. How are you feeling about gross margin as you look out to next year?

Speaker 3

Hey, Brad, this is Rob. We're confident in our ability to get back to a 40% gross margin. Obviously, supply chain costs are a nice tailwind for us now. We don't anticipate for them to head back in the other direction. So we feel like that'll be where it is.

Speaker 3

I think that shrink has Stabilized, it's not getting any worse, slightly better on a full year. But I think that with that being flat, we could certainly achieve the 40% gross margin.

Speaker 4

That's really helpful. Thanks so much.

Operator

And one moment for our next question. And our next question will be coming from Peter Keith of Piper Sandler. Your line is open Peter.

Speaker 5

Hi, thanks. Good morning, everyone. Nice quarter for me as well. To follow on Brad's first question, just thinking about The compare for 2024 and expectations to comp 1 to 2, curious if there are things that you can be doing now to sort of set that foundation and drive the continued growth against these compares?

Speaker 1

Yes, Peter, we're a closeout retailer and we buy what's available in the marketplace. So we always remind everybody Comping quarter by quarter can be a little challenging sometime, but annually we do believe the deals will present themselves. The biggest thing we can do as

Speaker 6

an organization to be able to set ourselves up

Speaker 1

for success is to to be able to set ourselves up for success is to be able to execute consistently. And I think we're doing that now and I think that's what we're going to be continuing to focus on going forward. The deals drive the business without a doubt and the merchants are working each and every day to try to do better and better year over year. So that's what we'll be focused on going out of this current fiscal year.

Speaker 5

Okay. And I know every year is a pretty good buying environment. For what it's worth, it does seem like your stores have a really good assortment of brand name merchandise right now. And I know you always try to drive to pretty consistent merch margin. So I'm wondering if actually the pricing gap that you have perhaps has widened a little bit to some of your key competitors, just better deal environment, Yes, more opportunistic pricing and if you hold the merch margin, you can give consumers a better value.

Speaker 5

Is that something you guys are playing for right now?

Speaker 1

We're not we're planning to try to get back to the 40, Peter. We're not there yet. We obviously did a very good job in Q3 and we feel pretty comfortable with Q4. But at the same time, we don't have visibility out that far to be able to say what we're going to see and what's going to be presented to us next year. But our number one focus is to give the best value to the consumer to motivate them, especially on the discretionary items.

Speaker 1

But if we can do better, we'll do better. But right now, we would tell you that we're going to try to get to the 40 and then we'll go from there.

Speaker 7

Okay. Thanks and good luck.

Speaker 1

Thank you, Peter.

Operator

And one moment for our next question. And our next question will be coming from Kate McShane of Goldman Sachs. Your line is open, Kate. Hi, good morning. Thanks for taking our question.

Operator

We wondered if you could walk through the cadence of comps that you saw throughout the quarter. And I know you discussed the categories that performed well during the quarter, but where did you see maybe some weakness within certain categories and how has that trended into Q4?

Speaker 3

I'll take the cadence and then I'll hand it off to John for the categories. From a cadence perspective, the strength that we saw from Q2 Spilled over into the beginning parts of the Q3. August September were pretty much equally strong. And then October was a little bit softer, but that was as planned as a result of the flyer change that we had talked about on the last call.

Speaker 1

Yes, Kate, obviously, we called out the strong categories on the call. The categories that we would say were underperformers Would not be a surprise, I think, to the overall market. Our underperformers in the quarter were furniture, domestics and clothing. Most all that's discretionary in nature or seasonally driven in nature, with what we're seeing. I would tell you going into Q4, 2 of those 3 categories are no longer the underperforming category.

Speaker 1

So, we've definitely seen some turnarounds in the domestics and clothing arena Going into Q4, furniture is something we have made a concerted effort to reduce in the last couple of years. There's just not a high demand for it. Biggest furniture category is really in the mattresses and that's something that we're still in, but most others, we really deemphasized the furniture category intentionally.

Operator

Thank you. And one moment for our next question. And our next question will come from Edward Kelly of Wells Fargo, your line is open, Edward.

Speaker 8

Hi, good morning everybody. Question I have for you on just promotional Cadence in Q3, I believe there was a 15% off coupon that you didn't run early in addition to The flyer that shipped it. So I'm curious if the impact overall was bigger than the 1% That you had talked about. And then as we think about Q4, that flyer shifts in. So do you still think that's 100 basis points based upon what you saw?

Speaker 8

And then what about like any other Couponing or sort of promotional considerations that we should be thinking about?

Speaker 2

Hi, Ed. It's Eric. I'll take the question. I think maybe in reverse order, the ad shift, print and digital were primarily driven by the print dates. It met our expectations shifting out of Q3 into Q4.

Speaker 2

So we're Expecting that shift to be, as you said, approximately 100 basis points into Q4. In terms of Promotions in general whether coupon or other promotions, we run coupon promotions from time to time although We're not promotional in nature. We're not a high low retailer. We do run promotions, as you've mentioned, from time to time. And It's not an exact science.

Speaker 2

We look at a number of factors, including variances in where the calendar falls, Timing of holidays, for example, there's an extra Saturday or meaningful weekend in this Christmas season holiday season in front of us, Business needs or inventory content and kind of where we stand and we make decisions tactical sometimes in the moment to Promote based on all of those factors. We have no plans to run any additional promotions this year At this point.

Speaker 8

Got it. Okay. And, go ahead. I'm sorry.

Speaker 2

No, go ahead. Sorry.

Speaker 8

Okay. And then just Holiday in general, I was curious if you could maybe talk about the Product offering that you have lined up, what are you seeing so far in terms of consumer response Demand, especially as it pertains to like post Thanksgiving at this point. And I guess how does current trends sort of Line up with the comp guide that you've got laid out for us.

Speaker 6

Yes,

Speaker 1

Ed, there's obviously there's still a lot of business to do between Today December 24, one of our biggest days of the year is this coming Sunday. So we tell you we feel good where we're sitting today. Trends are in line with where we want to be at. So we're very excited what we've seen from the consumer response There's definitely a little uncertainty out there in the marketplace with consumer and the demand, but I believe our values are winning And the customers are responding to our values that we're providing to them. So there's a longer shopping period that as well.

Speaker 1

So we've got a lot to go. We feel good. We're positioned. Our offerings are strong and we'll see where it lands out by the end of the season.

Speaker 8

Can I just squeeze one more in on SG and A? Could you quantify incentive comp for the quarter? And then what's the drag on that going to be in Q4?

Speaker 3

Sure. This is Rob. Incentive comp was about 50 basis points of a headwind to the Q4. So if you factor that in with the 40 basis points of leverage we showed in the financials, we got 90 we would have gotten 90 basis points of leverage this quarter with the 7 comp, which we were pretty pleased with. For the Q4, it's about a 60 basis point headwind and we've included that consideration in our guidance.

Speaker 3

Great.

Speaker 8

Thank you, guys.

Speaker 1

Thanks, Ed. Thanks, Ed.

Operator

And one moment for our next question. Our next question will come from Jason Hawes of Bank of America. Your line is open.

Speaker 9

Hey, good morning and thanks for taking my questions. I'm curious if you could talk about some of the improvements that you've made to the business Over the past year or so in order to better capitalize on this environment where folks are searching for value. So I'm curious in terms of Like supply chain and store operations, if you could just talk about some of the projects you've been working on there?

Speaker 2

Sure, Jason. We've been Continuing to work on improvement in productivity in the supply chain and in stores In various ways investing in process change as well as Some lighter investments in systems and in people to ensure that we can execute, ensure that we have we're consistently executing with a strong foundation. We also made a change as you're aware to our ads where we're Now advertising fewer items in ads, and I spoke about it a little bit earlier, that's working out quite well. It's driving traffic and it's Reducing complexity and the amount of product we need to move through the pipeline to hit a specific date For an ad break, so that's been a nice improvement as well. We We continue to invest in our DCs and material handling equipment to improve productivity, semi automation that's Very market established as well.

Speaker 2

And then we've talked a lot over the last few years about So I won't dwell on transportation. We've made some structural changes, especially in international transportation to how we approach The market and how we contract for freight. So we'll go into that in a lot of detail, but that was a pretty big breakthrough for us at kind of the peak of the chaos in the International transportation world. We do continue to have opportunities as we move into next year to enhance productivity, Become more efficient and we'll continue to invest on the store side, in particular, the way in which we move product from the truck to the floor It's been a focus of attention moving into next year.

Speaker 9

It's great color, really helpful. Thank you. And then as a follow-up, You mentioned that you recently opened a store in Long Island, recognize that one, I don't know if it's far out in Long Island or not, but curious, if you are starting to Open stores in higher cost locations? And if so, if that changes how you're thinking about that long term, 1050 store target, if there can potentially be upside? And then I guess also how those new stores are performing in these, if you are going to some higher

Speaker 2

Sure. I'll take that, Jason. Long Island loves Ollie. So Selden, New York is where we opened the store. It's off to a great start.

Speaker 2

We love Long Island, they love us. So I think the question about long term, we have Contemplated some high cost market stores in our 1050 store target. So that's already contemplated there. So we We need the economics to work, but we don't necessarily kind of blindly look at household income as a driver of whether or not a customer Like Ollie, we've seen a trade down in higher income customers that's meaningful. So that's encouraging, Especially over $100,000 in household income.

Speaker 2

And then when you look at

Speaker 1

a place like Long

Speaker 2

Island, discretionary income becomes A factor as well as the cost of living is also very high. There's maybe a lower discretionary income and customers love, love, love discount Retail on Long Island as a result. So we consider that as well.

Speaker 1

I think Jason, just one takeaway from it. There's definitely not a strategic Change to our store growth philosophy, but there was an opportunity there that worked for our model and we took it. So we'll continue to be opportunistic. But strategically, there's been no change on how we're going to open stores going forward.

Speaker 2

Yes. I think John makes a good point. Our real estate strategy is opportunistic in nature. So we have To open stores that make sense, whether high cost or rural, we look at them, we consider them and we A lot of qualitative attributes around the store to consider and if it all adds up, we open the store.

Speaker 9

Got it. That's helpful. Thank you.

Speaker 2

Thanks, Jason.

Operator

One moment for our next question. Our next question will come from Eric Cohen of Gordon Haskett. Your line is open.

Speaker 6

Hi, good morning. Great quarter, guys. You commented earlier in the call that you're confident you can get back to an unalgo comp for next year. I'm just curious as The company gets bigger and bigger and you guys have a lot of momentum. Do you have to change the way you approve deals and the deals you accept And do you need larger, bigger deals to grow as the business scales?

Speaker 1

Eric, we've been doing this for a long time and Closeouts are closeouts, and we do not have any hard fast rule on the size of the deal. If it's a small deal and it works Since it's the right value for our customer and the right margin for our profile, we're not afraid to buy and put it into just one specific region. We'll look at everything in there. There's no set hard fast rule where our merchants say no to a size of a deal.

Speaker 6

Great. And this is You guys have said 50% of categories comp positive. This is another quarter where more than 50% have comped positive. Is this a reflection of Did that improve value proposition? Any change in consumer spending in terms of trading down?

Speaker 6

Or is this just better execution and deal flow from you guys?

Speaker 1

I would say it's probably all of the above. I think the deal flow has been strong. The offerings we've had in our stores have been strong. The customers have been responding. There's definitely been a trade down and there's a need for value more so today than there has been.

Speaker 1

So I think that's just our offerings are resonating with the consumer.

Speaker 6

Okay. Appreciate

Speaker 1

it. Thanks, Eric.

Operator

And one moment for our next question. Our next question will come from Jeremy Hamblin of Craig Hallum Capital Group. Your line is open.

Speaker 10

Thanks. And I'll add my congratulations on the strong results. In terms of capital plans and investment for next year, you have obviously the new DC. I think you indicated 35 remodels for 2023. And just wanted to get a sense, it sounds like you're On track for 50 kind of your 50 to 55 new unit openings next year.

Speaker 10

I wanted to confirm that, 1, and then also just get a sense on the remodels, which sound like they're going well. Should we expect A similar type of number for 2024.

Speaker 3

Hey, Jeremy, this is I'll take a couple of pieces of that multipart question and Eric will take a couple. From a capital planning perspective, We typically, from an Al Analgo perspective, would plan for 2% to 2.5% of sales as our capital plan. For next Here we do have the carrying of the completion of the 4th distribution center that would increase that number. I would say without giving guidance for next year, I would say probably in the range of $75,000,000 for next year just with the carryover. From remodels and new store units, I'll hand it off to Eric.

Speaker 2

Thanks, Rob. Jeremy, The remodel program, it's less about how many, it's more about maximizing the effectiveness, enrolling the best improvements that we're making to these stores into the rest of the chain, As well as influencing our new store design and tweaking our new store design as we're going forward. With that said, we're Expecting to remodel approximately the same number of stores next year, approximately. Again, to Rob's point, not giving guidance at this point. From a tying into capital, They're relatively light from a capital standpoint.

Speaker 2

Total investment is between $125,000 $200,000 So it doesn't add up to particularly Material numbers, percentage of our overall capital spend, low cost, relatively quick paybacks.

Speaker 10

Got it. And then just switching gears to you had some interesting color on some of your marketing plans and how that's developing More use of social media and influencers. I wanted to see if you could elaborate on that. And I think you also noted that younger customers were your fastest growing segment. I wanted to see if you could Clarify the age range that you're talking about and just potentially expand what the company's plans are in terms of those marketing efforts to continue to expand your army?

Speaker 2

Sure, Jeremy. I guess kind of a retrospective on marketing Several years ago, we've spent almost nothing in digital channels. It's about as close to 0 as you can get. Now several years later, it's over a third of our overall marketing spend. So it's very, very meaningful.

Speaker 2

We hired a marketing As well, we really knew digital, Tom Kuipers, to the team several years ago, and he's really accelerated, propelled Our investments in digital over the last several years, a large percentage of that investment is in social media channels, Meta channels, Facebook and Insta, we have a strategic relationship with Google now and with YouTube. We're on TikTok. The influencer program, over 50 now that we're working with mostly nano micro We think authenticity is really critical with influencers. So we look for people that are already talking about us And then give them incentive to talk about us more. So, we continue to test in Every available digital channel to see what's most effective.

Speaker 2

And to your point, it does look like it's Producing results in growth of younger customers. In terms of defining the age of a younger customer, We're seeing strength in the under 45 year old customer, so call it 18 to 40 5, as well as the 45 to 55 year old customer. We have a large percentage of customers That are over 55, which are indexing slightly down and cohorts below 45 are indexes up and we see very positive momentum There.

Speaker 10

Great. Thanks so much for all that color. Best wishes.

Speaker 2

Thanks, Jeremy.

Operator

One moment for our next question. Our next question will come from Matthew Boss of JPMorgan. Your line is open.

Speaker 11

Great, thanks and congrats on a nice quarter. Thanks, Matt. So John, maybe larger picture at 1% to 2% same store sales, What do you think is the right operating margin, maybe longer term for the business? Or how best to think about a bottom line annual growth algorithm with the business returning to that 1% to 2% historical comp trajectory going forward.

Speaker 1

Yes, I think, Matt, the 1% to 2% comp Long term algo, the operating income will be definitely compressed from our, I'll call it, our all time high. If you look at 2019 per se, we have increased costs now in the SG and A world that are permanent in nature. We used to probably think we used to be probably close to 25.3 percent SG and A ratio. It's probably closer to mid-26s now. So probably about 100 basis point loss And overall operating income.

Speaker 1

So I would say that you probably see that on a carry forward long term basis. As we go, you might get a little 10 bps here and there, but not much More than that on a significant basis. So I think that with the top line growth and the margin of 40 points, we should be able to still be able to maintain double digit EBITDA growth every year for the foreseeable future.

Speaker 11

Great. And then maybe, Rob, just a follow-up on the gross margin. Any puts and takes in the Q4 just to consider? And then as we think about the spread in terms of your values in the marketplace today, is 40% a multiyear gross margin feeling or do you think there's any opportunity there to potentially press that a bit higher?

Speaker 3

I'll take the first part of the question and I'll hand it off to John on the second part of the question in terms of the longer term outlook on gross margin. From a Q4 perspective, we'd expect for Q4 gross margin to expand from last year. We are expecting benefits in supply chain costs probably in the range of what we saw this quarter. So as a reminder, the 4th quarter is always a little bit lower than the Q3 in terms of gross margin because of the promotional cadence and how the Ollie's Army Night indexes into the quarter, but we'd expect a similar type gross margin strong gross margin performance in the 4th quarter.

Speaker 1

Yes. Matt, with regards to the overall, I'll call it the long term margin, we do view the value as Key and value is paramount and we've always focused on giving back to the consumer once we hit 40. We're going to continue to focus on that at this point in time. But I do understand there are incremental fixed costs in the SG and A line that we do have to take into consideration from an overall operating perspective. So We will continue to look at that, revisit it.

Speaker 1

But number 1, I got to give the value to the customer. If I have the opportunity to get a little bit more on the margin, I will. But we need to be very careful with that. We got to make sure we stay relevant with the customer and keep the loyalty.

Speaker 11

Great color. Best of luck.

Speaker 1

Thanks, Matt.

Operator

One moment for our next question. Our next question will come from Scot Ciccarelli of Truist. Your line is open.

Speaker 7

Good morning, guys. Scott Cicalrelli. I have a derivative on one of the earlier questions. You guys used to talk about turning down, I think about 90% of the offers that you received from vendors. Can you update us on where that is today, especially as you hit the 500 store mark?

Speaker 1

Yes, Scott, I think we say about 80% would turn down. I would tell you it's probably very similar today. The deal flow is very, very strong. Our merchants are being very selective in what they're buying from The vendor community, so that's not changed. We're seeing a big increase in flow from the community.

Speaker 1

So we're not Struggling to get product into the pipeline at all.

Speaker 7

All right. So you're still accepting about the same proportion. Got it. Yes. And John, you guys also And you also talked about seeing obviously the strong deal flow.

Speaker 7

Can you help us understand where is it coming from? Meaning, is it coming from certain That's in the vendor community, whether it's CPG or other categories, verticals, etcetera. And alternatively, are there any areas where you might expect to see better deal flow as we kind of roll into 2024? Thanks.

Speaker 1

Yes. Scott, I would tell you that this year at least I could tell you it's been very, very broad based. Almost every category we carry, we've seen a very significant amount of deal flow. I talked last year that we were starting to see some slowdown in the offerings of Kandi. Well, that flipped in 2023 and Kandi was very strong.

Speaker 1

So the overall, if I look at deal flow, we've been seeing great deals in HBA housewares, Clothing, lawn and garden, electric auto. So it's just been all over the board. There's not really a shortfall in any category that I would tell you we're missing any business. I mean, it's broad based from either the CPGs are out there, major manufacturers are out there. There's wholesalers that are out there, but we're continuing to Knock on the doors of the major manufacturers to go direct with them and that's working very well.

Speaker 7

Got it. Thank you very much.

Speaker 1

Thanks, Scott.

Operator

One moment for our next question. Our next question will come from Mark Carden of UBS. Your line is open.

Speaker 12

Good morning. Thanks so much for taking the questions.

Speaker 6

So it sounds like you're continuing

Speaker 12

to see strength in customers with greater than $100,000 in household income. How are repeat trips For this demographic comparing now to some of your more traditional demographics. And then how are these shoppers impacting your sales mix from a category standpoint? Are they buying higher ticket items or are they more consistent with what you're used to?

Speaker 2

Sure, Mark. I'll take the question, Eric. We are seeing strength as you mentioned in household incomes of $100,000 or greater. We're seeing actually particular strength over 150,000 We are seeing an increase in increased frequency from these customers as well, Which is great to see and basket size consistent or greater to the overall basket size of Ollie's Army. I don't know the makeup of the ticket question.

Speaker 2

So that's something I'd have to study. You're asking about average, our AUR for that For Bates, I don't know the answer to that.

Speaker 12

Okay. That's so helpful. And then just on the labor front, What are you seeing there as we look ahead to 2024? And any thoughts on potential incremental pressure there?

Speaker 2

We it's hard to forecast, but in this moment, we're more stable than we were a year ago In terms of overall turnover, so it feels like that will continue into 2024. We're expecting Some pressure, but not as much pressure as we felt the last couple of years. We still do have some challenges with I'll call it the churn of people that are with us for less than 90 days. But overall, it is improving. I'll Ask Rob maybe to add some color on wage investments.

Speaker 3

And I would say from a wage investment perspective, we've come a long way over the last couple of years. This year was a mid single digit wage increase across our store population. For next year, in terms of The outlook in terms of operating margin and what John referenced, we would consider a mid single digit increase for next year. Obviously, we're not giving But we think mid single digit for next year, but potentially inching back towards the lower single digit range.

Speaker 12

Great. Thanks so much. Good luck, guys.

Speaker 8

Thank you, Mark.

Operator

And one moment for our next question. Our next question will come from Paul Leves Citi, your line is open.

Speaker 13

Hey, everyone. This is Brandon Sheetham on for Paul. I was wondering, could you kind of break out what You changed for your Q4 outlook and then just spend a little time on particularly the comp, 3% comp The decent step down from 3Q, I understand we have a lot of time left for holiday to go. Just trying to gauge how much of that is conservative or What you might be seeing quarter to date? Did you see any changes in consumer behavior in mid October like some other retailers called out?

Speaker 3

I'll speak to the Q4 guide and the financial information and then I'll let John speak to the demand in October. From a guidance perspective, we no longer give quarterly guidance. We suspended doing that earlier this year. We updated our annual outlook, which considers a 3% comp for the Q4. We tightened our gross margin range Based on the strength of the Q3 performance, we're going to in terms of the Q4 sales guidance, We're going to continue to take a measured approach to guiding and setting expectations.

Speaker 3

But we there's a saying we have around here That we're not going to shut the registers off, so stick with us and we'll look to do better if we can.

Speaker 1

Yes, Brandon, with regards To the consumer demand that some others might have spoke about in October, October was pretty much in line with our expectations. As you may recall, we shifted out an ad From October to November, so we expected a little bit of slowdown in that month, but nothing was really alarming to us at the end of Q3. Obviously, we're for us to you've been following us for a long time for us to raise our guidance in a quarter that we're in today is Means a lot to it should mean a lot to the street that we're actually doing better than expected, and we're excited from where we're at. But there's a lot of business So go here for the next 12 days and we'll see where everything lands.

Speaker 13

Got it. I appreciate that. Just on the supply chain costs in the 3rd quarter, Sounds like that may have been a bigger benefit than you initially expected. So just wondering, is that the case? Is that kind of back Normal levels, whether that's back to the 2019 or however you gauge that.

Speaker 13

And then is there potential if like these trends continue, like Would that be a potential benefit into next year?

Speaker 3

This is Rob. So supply chain was pretty much in line with our expectations. We have some good visibility going out of quarter the way that the accounting for the model works in terms of the capitalization of the costs. In terms of the composition of the supply chain costs, we're getting great ocean freight rates. They're below pre pandemic levels.

Speaker 3

We still do have an incremental wage investment that's in there from kind of pre pandemic algo levels, But it's relatively minor. We would in terms of trend, we would expect some favorability on the domestic transportation front over the next months into years. But we wouldn't plan for any further improvement on ocean freight Given where it is versus pre pandemic.

Speaker 13

Got it. Thanks very much and good luck guys.

Speaker 2

Thanks, Brian. Thank you.

Operator

I would now like to turn the conference back to John for closing remarks.

Speaker 1

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

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect.

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Earnings Conference Call
Ollie's Bargain Outlet Q3 2024
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