Ollie's Bargain Outlet Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
March 20, 2024

There are 13 speakers on the call.

Operator

Good morning, and welcome to Ali's Bargain Call to discuss financial results for the 4th Quarter and Fiscal Year 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 expressed written authorization of Ollie's. Joining us on today's call from Ollie's management are John Swaggart, President and Chief Executive Officer Erik Van Der Vlach, Executive Vice President and Chief Operating Officer and Robert Helms, 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 could cause actual results to differ materially from such statements. Those risks and uncertainties are described in our annual report on Form 10 ks and quarterly reports on Form 10 Q on file with the SEC and 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 financial measures to non GAAP financial measures are included in our earnings press release. With that said, I'll turn the program over to Mr. Swager. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. We appreciate you joining our call today. We had a strong Q4 and fiscal year. For the Q4, we delivered better than expected top and bottom line results. Comparable store sales increased 3.9%, our 7th consecutive quarter of positive comps.

Speaker 1

Our comp store sales growth was broad based with over 60% of our product categories comping positive in the quarter. In addition to the solid comp store sales growth, we also delivered very strong margin growth. Gross margin increased 290 basis points to 40.5%, which in turn helped us deliver a 46% increase in adjusted earnings per share. The Q4 capped off a great year for HOLLY's. Fiscal 2023 marked a return to the strong financial performance and consistent execution at our hallmark at Ollie's.

Speaker 1

We are proud of our team's achievements this past year, which included a number of records and milestones. In fiscal 2023, we generated record net sales and crossed the $2,000,000,000 mark for the first time in our 41 year history. We opened our 500th store and entered our 30th state. We returned to our long term algo gross margin target of 40% in the second half of the year. We added a record 3,600,000 new Ollie's Army members and grew to almost 14,000,000 active members strong.

Speaker 1

We beat and raised our full year sales and earning estimates in all four quarters. And most importantly, we returned to a pattern of consistent execution and strong financial results. We feel very good about the underlying trends in our business and our focus on long term growth. We recently completed our latest 3rd party real estate feasibility study, which utilizes demographic data and density across a changing U. S.

Speaker 1

Landscape. The migration trend out of larger metropolitan markets into rural and suburban areas over the past few years is a positive trend for HOLLY's and our analysis supports a new long term target of 1300 stores, up from a previous 1050. Everyone loves to bargain and as consumers seek value, we are positioned to win.

Speaker 2

We sell good stuff cheap,

Speaker 1

high quality name brand products at prices typically 20% to 70% below the fancy stores. Since our founding over 41 years ago, we have built our model around closeouts and bargains. In doing so, we have developed deep relationships throughout the vendor community, built an experienced team of talented buyers and set up our distribution network to handle deals of all shapes and sizes in a cost effective and agile manner and develop a trusted and loyal customer following. Today, consumers are looking for bargains and manufacturers are looking for trusted partners who can help them manage their inventory and supply chains. Larger retailers are being supplied by larger manufacturers and this leads to larger orders and product flow.

Speaker 1

At the same time, manufacturers are constantly developing and introducing new products, new packaging and working around endless changes and disruptions in the marketplace and supply chain. This is driving strong growth in the closeout market. We are the king of closeouts and we are built for this environment. Nobody has our experience, size, scale and credibility in the closeout market. With over 41 year history and extensive relationships, manufacturers know we are a trusted and reliable partner for excess and closeout products.

Speaker 1

As a result, our purchasing power is growing and we're becoming more and more meaningful to the vendor community. We have made significant investments to enhance execution and drive productivity. We have invested in wages across the entire company, our distribution centers, our stores, the field management teams and store support center. We have enhanced major operational teams such as the supply chain, loss prevention, real estate and marketing, expanded our distribution capabilities, implemented new technology and systems, initiated a store remodel program and retooled our marketing campaigns and expanded our digital capabilities. Clearly, these investments are paying off.

Speaker 1

Our customer base is expanding, our productivity levels are increasing and our costs are well under control. In short, we are executing well and delivering strong and consistent financial results. Now let me turn the call over to Eric.

Speaker 3

Thanks, John, and good morning, everyone. Our Q4 fiscal year results reflect the strength of our deals, the hard work and commitment of our team and our execution across the organization. Process improvements and investments we have made in our people, supply chain, stores and marketing continue to drive better productivity and strong results. Our growth is focused on a number of core initiatives, offering amazing deals, expanding our reach through new store openings, digital marketing and Ollie's Army, leveraging investments to drive operating efficiencies and execution. In the Q4, we opened 7 new stores and hit our target of 45 new store openings for the fiscal year.

Speaker 3

The 30 store openings in the back half of the year was a new record. We continue to pursue a contiguous growth real estate strategy that leverages brand awareness, marketing reach and our supply chain. With the opening of our 500 store in Iowa City, we now operate in 30 states. In fiscal 2024, we are targeting to open approximately 50 new stores with a good portion of these in existing markets and the Midwest. In addition to opening new stores, we continue to upgrade our existing stores through our remodel program.

Speaker 3

Over 10% of our store base has now been remodeled and we are applying our learnings to both existing stores and new store design.

Operator

Again, sorry, ladies and gentlemen, for the inconvenience, but please stand by. Ladies and gentlemen, Michel, are you able to hear us?

Speaker 4

Yes. Hi. I can hear you now.

Operator

All right. Great. Yes, you may proceed.

Speaker 4

Okay. Again, everybody, we apologize for the technical difficulties. We're going to resume the Ollie's conference call with Eric starting back in on his portion. Thank you, everybody.

Speaker 3

All right. Thank you, John Rulo. Thank you, John Swagger. Good morning, everyone. Our Q4 and fiscal year results reflect the strength of our deals, the hard work and commitment of our team and the execution across the organization.

Speaker 3

Process improvements and investments we have made in our people, supply chain, stores and marketing continue to drive better productivity and strong results. Our growth is focused on a number of core initiatives, offering amazing deals, expanding our reach through new store openings, digital marketing and Ollie's Army, and leveraging investments to drive operating efficiencies and execution. In the Q4, we opened 7 new stores and hit our target of 45 new store openings for the fiscal year. The 30 store openings in the back half of the year was a new record. We continue to pursue a contiguous growth real estate strategy that leverages brand awareness, marketing reach and our supply chain.

Speaker 3

With the opening of our 500 store in Iowa City, we now operate in 30 states. In fiscal 2024, we are targeting to open approximately 50 new stores with a good portion of these in existing markets and the Midwest. In addition to opening new stores, we continue to upgrade our existing stores through our remodel program. Over 10% of our store base has now been remodeled and we are applying our learnings to both existing stores and new store design. Our new distribution center in Illinois will support our continued growth in the Midwest and is on track to start up full operations in the second half of this year.

Speaker 3

Our 4th distribution center expands our capacity to service an additional 150 to 175 stores. When combining this with investments we've made over the past year, we will have the ability to service up to 7 50 stores. On the marketing front, we continue to shift advertising dollars into various digital and social media platforms, including influencers across TikTok, Instagram and Facebook. For Black Friday and Christmas, we tested a series of video ad formats that generated millions of views and over a 1000000000 impressions in Google channels, including YouTube. Our digital flyer registered over 300,000,000 impressions with Facebook and Instagram users.

Speaker 3

Our expanded digital marketing program is helping us to reach new and younger customers and keeping Ollie's the birthplace of bargains, top of mind with existing customers. Our growing customer base is reflected in our Ollie's Army numbers. As John mentioned, we had a record year in customer additions with over 3,600,000 customers added to Ollie's Army this year alone. In line with the growth in the younger customer demographic we are attracting, we are also seeing growth in younger customers joining Ollie's Army. Lastly, we continue to benefit from the trade down effect we have experienced over the last several quarters and are seeing strong retention from this customer cohort.

Speaker 3

Touching on supply chain for a moment. Our annual international carrier contracts are renegotiated every May. This is an area where we have made significant improvements over the past few years. We have overhauled our team, brought in new systems to improve visibility and execution and increased the number of direct carrier relationships. Most importantly, we have leveraged our volume to negotiate favorable annual contracts in terms.

Speaker 3

Now almost 90% of our foreign shipping are covered under contract. As a result, we have very little exposure to the spot market. As a reminder, around 20% of our overall purchases are imports. In addition, we have not seen any meaningful impact from the shipping disruptions through the Suez Canal and our import costs remain well controlled. Like other retailers, we don't know what could happen to import tariffs as a result of the upcoming presidential election, but do want to remind everyone that we negotiate pricing fluidly based on prices in the marketplace on a relatively short term basis.

Speaker 3

If prices were to increase from the implementation of new tariffs, we would adjust our buying accordingly and offer the same compelling value to our customers, while delivering margin within our targeted parameters. We continue to watch the real estate market closely. While the market is a bit tight at the moment, we think this could start to loosen up with some of the more recent and potentially forthcoming store closures and bankruptcies. The strength of our business model and particularly our balance sheet provides us with the positioning to seize this opportunity as it arises. Before I turn the call over to Rob, I would like to take a moment to thank our incredible team of associates who are value obsessed and committed to executing the different areas across our business day in, day out.

Speaker 3

John alluded to the consistent results we delivered this quarter, and this is only possible when our entire team is working together to execute the business.

Speaker 2

Rob? Thanks, Eric, and good morning, everyone. We're extremely pleased with our 4th quarter and full year results, which came in ahead of our expectations, driven by strong sales growth and healthy margin expansion. Our 4th quarter adjusted earnings per share was a new record number for Ollie's. For the year, we achieved a record $2,100,000,000 in net sales, expanded gross margin by 3 70 basis points and increased adjusted earnings per share by 80%.

Speaker 2

In the Q4, net sales increased 18% to $649,000,000 driven by new store growth, comparable store sales growth and the 53rd selling week. Our comparable store sales increased 3.9% and was driven primarily by transactions. Our category strength was broad based with over 60% of our product categories comping positive. Our best performing categories were food, seasonal, candy, housewares and sporting goods. Finally, the 53rd selling week added approximately $34,000,000 to net sales in the quarter.

Speaker 2

Ollie's Army increased 5.9 percent to 14,000,000 members and sales to our members represented over 80% of total sales. As both John and Eric mentioned, we added a record 3,600,000 members in 2023 and the number of non active members purging from Ollie's Army is moderating. This should bode well for net member growth going forward. During the quarter, we opened 7 new stores, ending with 5 12 stores in 30 states, an increase of 9.4% year over year. The timing of our new store opening did slightly impact new store productivity in the quarter, but our new stores continue to ramp and perform in line with our expectations and pro form a models.

Speaker 2

Gross margin improved 290 basis points to 40.5% compared to last year, primarily driven by favorable supply chain costs and a higher merchandise margin driven by lower shrink. SG and A expenses as a percentage of net sales increased 30 basis points to 24.1 percent due to higher incentive compensation, partially offset by leverage of fixed expenses on the increase in net sales. Operating income increased 44.3 percent to $98,000,000 and operating margin increased 270 basis points to 15% in the quarter. Adjusted net income increased 45.5 percent to $76,000,000 and adjusted earnings per share was $1.23 compared to $0.84 last year. Adjusted EBITDA increased 43.2 percent to $111,000,000 and adjusted EBITDA margin increased 300 basis points to 17% for the quarter.

Speaker 2

Turning to the balance sheet. Our cash position remains strong. With $353,000,000 between cash on hand and short term investments and no outstanding borrowings under our revolving credit facility, which we extended for another 5 years at favorable economics to the current market conditions. For the full year, we generated $254,000,000 in cash from operations. Inventory increased 7.5 percent to $506,000,000 primarily driven by new store growth, partially offset by the impact of lower capitalized freight costs.

Speaker 2

Capital expenditures totaled $43,000,000 for the quarter and were primarily for the development of new stores, the remodeling of existing stores and the construction of our new distribution center in Illinois. During the quarter, we invested $13,000,000 to repurchase shares of our common stock. We repurchased $53,000,000 during the year and have $86,000,000 remaining on our current share repurchase program authorization. We remain 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 2024.

Speaker 2

As John mentioned, we continue to benefit from a strong closeout market as well as improved execution across many facets of our business. While we entered the year with nice momentum, we always initially planned the year around our long term algo of 1% to 2% positive comp growth for purposes setting our cost structure and leverage points. With that framework in place, for the full year, which is a 52 week year compared to 53 weeks in 2023, we expect total net sales of $2,248,000,000 to 2,273,000,000 dollars comparable store sales growth of 1% to 2%. The opening of 50 new stores, less 2 closures where we chose not to renew. Gross margin of approximately 40 percent.

Speaker 2

Operating income of $243,000,000 to 251,000,000 dollars adjusted net income of $192,000,000 to $198,000,000 and adjusted net income per diluted share of 3.10 dollars to $3.20 An annual effective tax rate of 25%, which excludes the tax benefits related to stock based compensation diluted weighted average shares outstanding of approximately $62,000,000 and lastly, capital expenditures of approximately $85,000,000 including approximately $30,000,000 for the completion of our distribution center in Princeton, Illinois. Now let me provide some color on how we're thinking about quarterly comps and store opening cadence as well as a few other numbers to help with your models. With our continued momentum, we expect to deliver Q1 comps slightly above the high end of our annual guidance range. For Q2, we are planning comps to the midpoint of our annual guidance range. For Q3, we anticipate comp sales to be flat due to a change related to the calendar shift in the 53rd week.

Speaker 2

And as a result of the shift, we would expect Q4 comps to be slightly above the high end of our annual guidance range. For new stores, we're modeling approximately 30% of our openings in the first half and 70% of our openings in the second half. Related to store openings, we expect preopening expenses, including expenses associated with our remodel program to be approximately $17,000,000 for the year. In terms of gross margin, we anticipate most of our improvements occur in the first half of the year as we lap our stronger results in the second half of the year. We're planning for depreciation and amortization expense of approximately $42,000,000 which includes $11,000,000 that runs through cost of goods sold.

Speaker 2

And lastly, we expect net interest income of approximately $13,000,000 which considers a higher average cash balance for the year, partially offset by the impact of the potential for lower interest rates in the back half of the year. Now let me turn the call back over to John.

Speaker 1

Thanks, Rob. Operating a closeout retail business is not for the faint of heart. It takes a lot of dedicated team members who are passionate about selling good stuff cheap to execute our model. We know the holiday season was a very busy time for our associates this year, and I want to congratulate our team for the way they managed the business and delivered results. I am very proud of their performance this past quarter year.

Speaker 1

As we say, we are

Speaker 2

Always.

Speaker 1

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

Operator

Certainly. And our first question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question please.

Speaker 4

Hi, good morning. Thanks for taking my question and congrats on a strong 2023.

Speaker 1

Thanks, Brett.

Speaker 4

John, I just wanted to circle back on a question that we've been asking, and investors have been asking really for the past year as you've started to see this strong momentum in your business. Can you talk a little bit more about the line of sight on sourcing and your confidence that you can comp the comp as we move here through 2024?

Speaker 2

Yes. Brad, this is a

Speaker 1

question we've gotten for a long period of time. With regards we've been doing this for 41 years. The relationships we've built over that time period are very, very strong. Closeout the closeout market is a very large market. As we said before, it's when I first started talking about it was about $80,000,000,000 market.

Speaker 1

Now it's probably closer to $115,000,000,000 market. So and we just surpassed the $2,000,000,000 sales number for this year. So there's plenty of excess inventory out in the marketplace. So that does not bother us or the company to be able to comp to comp or find their source deals. The deal flows are very, very strong and have been strong and they'll continue to strong.

Speaker 1

So that doesn't bother us from that perspective. Line of sight has always been the major question because we're buying closeouts, we're not manufacturing goods, so we don't see too far out. I can't tell you what we're going to buy in June July, but when you do when you're living this every day, you do have and feel the momentum that's out there and the surplus is sitting in the marketplace. So with our continued size and scale, we've become much, much more meaningful and built these relationships with the manufacturers and we believe we're

Speaker 2

positioned to continue to

Speaker 1

deliver the results and we're not afraid of that. We're positioned to continue to deliver the results and we're not afraid of that.

Speaker 4

That's very helpful, John. And as a related follow-up, it's encouraging to see the increased long term store target. Can you talk a little bit more about the work on the sourcing side and the merchandising side that goes into your confidence in supporting that increased store base?

Speaker 2

Yes. As we've talked about for

Speaker 1

a long time, Brad, we got this question at 100 stores. We got this question at 200 stores. The deals keep getting bigger and bigger and our relationships with the direct manufacturers keep getting bigger and bigger. And as we scale and we get more coverage of the United States, the facilities that they operate in continue to be a natural fit for us. So the store count and I think people always get worried about other folks who have been in the closeout industry and they've not succeeded over many years.

Speaker 1

This is all we've done. We've never gone away from our knitting. This is what we've done for 41 years. This is all our buyers focus on each and every day. So we're committed to closeouts.

Speaker 1

It's definitely an inconvenience business. But like we said, this is something that we live and breathe every day and this doesn't bother us from a scale perspective. We've talked about in the past as we scale up our store base, do close ups become a slightly smaller percentage of the overall purchases? Sure, it does. I don't think the customer ever notices that.

Speaker 1

And I do think our merchants will continue to push and deliver closeouts. I never see us getting below 50% closeout in our total business. I just think there's enough abundance out there for us to be continuing to drive that shopping experience for our customers.

Speaker 3

Brad, this is Eric. I'll just add on a comment that this is a fragmented marketplace, the closeout business and our size is a differentiator, a very important differentiator as we continue to grow and also highlight that we have a very strong balance sheet, which is another piece that makes us stand apart from others that are in this business.

Speaker 4

I appreciate it. Thanks guys.

Speaker 1

Thanks Brad.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Kate McShane from Goldman Sachs. Your question please.

Speaker 5

Hi, good morning. Thanks for taking our question. We wondered what impact you might be seeing. It sounds like the guide on Q1's in store sales is pretty solid, but just what impact you might be seeing as the tax refunds here seem to be a little bit slower coming in versus last year and if it's having any kind of impact on you?

Speaker 2

Hey, Kate, this is Rob. We the tax refund piece has been widely reported and it's something certainly that we're tracking. Obviously, more liquidity for our customers and their wallets is good for business, good for all resellers. To date, we haven't really seen it have a significant impact coming off of last year. I think the IRS has reported they're about a week behind, but average refunds on it that are going into customers' hands are bigger.

Speaker 2

So net net, I would say not much of an impact so far.

Speaker 5

Okay. Thank you. And then our second question was just on remodels. Can you remind us again the lift that you get from the remodels and what the cadence in 2024 will look like?

Speaker 3

Tate, it's Eric. We expect a mid single digit lift from remodels. We're repositioning the program a bit going forward. So we'll talk about full remodels, where we're reorganizing the store, potentially installing racetracks, reflowing the stores, changing adjacencies, etcetera. We expect that we expect to remodel around 20 stores.

Speaker 3

We're also touching at least 30 stores with some degree of updating, which includes installing front end cues, way finding and some other adjustments. So it's really going forward, we're learning from our experience in the remodel program, what gets us the biggest return and what improves the customer experience the most and we're investing in those elements in more sources we move forward.

Speaker 5

Thank you.

Speaker 1

Thanks, Gabe.

Operator

Thank you. One moment for our next question. And our next question comes from the line of Peter Keith from Piper Sandler. Your question please.

Speaker 6

Hey, good morning everyone. Congrats from me as well. It was a great year. Looking at the new store target of 1300, I was curious how you're thinking about annual store growth going forward. I believe the target has been 50 to 55 per year.

Speaker 6

Is that how we should still kind of model out longer term unit growth on an annual basis?

Speaker 3

Hi, Peter, it's Eric. Yes, we have we build our infrastructure to open 50 to 55 stores a year, as well as executing on the remodel program. Just to remind everyone, in 2022, we opened 40 stores. In 2023, we committed to 45, opened 45 and we're committing to 50 in 24. So you can see a cadence to growing the number of stores that we're opening.

Speaker 3

That being said, we have a disciplined approach to growth. We will not risk execution. There is a lot of disruption in the market, which is trading opportunities on the real estate side and we feel very good about the pipeline looking out into future years, 2025 and 2026. With this new real estate study in hand, we're evaluating what would be required to accelerate growth. Our supply chain, opening the Illinois warehouse, D.

Speaker 3

C. Is a big leap forward and our ability to scale. The pipeline, of course, of real estate, store leadership, store support teams. And we'll get back to you in a few quarters with what that looks like for the out years.

Speaker 6

Okay, very helpful and interesting. Secondly, I did want to ask about tariffs. You mentioned it about 20% of products or maybe 20% of sales are imported. And I guess what's the philosophy just thinking ahead if tariffs do get implemented, do you think about diversifying away from China? Or on the other hand, I was thinking about maybe other companies are diversifying away and that therefore creates more closeout opportunities with Chinese factories and suppliers.

Speaker 6

So just curious how you're thinking about maybe the approach to China sourcing on a multiyear basis here?

Speaker 3

Sure. Peter, it's Eric again. We do think about both elements of your question. We think about diversifying and derisking around China with that 20% that is direct. We also think about the opportunities it creates as we move into a period that may be somewhat disruptive.

Speaker 3

All that being said, our business is primarily closeout oriented and tariffs will have an impact on everything that not everything, but percentage that comes out of China potentially across multiple categories of business. And we're not concerned about it because of what I said in my opening remarks. From a pricing standpoint, we're very fluid as we're buying closeouts that may over time be impacted by increasing tariffs were pricing in the marketplace. And typically what's happened is we've been through this a couple of times in the past is prices are increased across various competitors and we price up accordingly and ensure that we can deliver margin. So we feel good about it.

Speaker 1

We're not losing sleep about tariffs. Yes. Peter said a little bit to that in a different way, but we would say that we're a price follower, not a price setter. So as the market moves, we move accordingly and we keep that same value proposition. So whether the tariffs come in or out or whether people move business from China to another country, we're just following what the market is doing.

Speaker 1

So we're in a very good position. And also to your point, we call them stock class, but closeouts that could be in China if things don't move out of there are opportunities for us to be able to buy product and bring into the country. So we believe we're well positioned for this. And as we always say, when anytime there's a disruption, we do normally win at that. So that this is something that could also play in our hand.

Speaker 6

Okay. Very helpful, guys. Thanks so much and good luck.

Speaker 1

Thanks, Peter.

Operator

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.

Speaker 7

Hi, good morning everyone. I wanted to maybe ask promotional cadence for the year and how you're thinking about any change there? Like I noticed there was an earlier March flyer that I think shifted back. Obviously, you have a harder pretty hard like Q2, Q3 compare. I'm not sure if you're thinking about anything differently there or in Holly.

Speaker 7

Just how should we think about promotional cadence? You did mention some movement around the comp by quarter. So just maybe a little bit more color there?

Speaker 1

Yes. Ed, I'll answer it and then maybe Eric or Rob will add into it. But with regards to promotional calendar, it's pretty much the same as last year. We are experiencing a shift from Q3 to Q4, just naturally because of the 53rd week occurring and how the weeks fall. And then obviously the compressed holiday selling period from Thanksgiving to Christmas this year.

Speaker 1

But the cadence is right now planned to be pretty comparable to last year and we feel very comfortable we're sitting today.

Speaker 7

And just as maybe a follow-up to this question around the comparison. John, how are you thinking about the mix of the product that you think you'll be buying? So you think about last year, are you going to lap this Coleman blowout, which I'm sure was very good. I don't know if you're anticipating like consumable versus gen merge, right, like how you're looking at that? Maybe that would be helpful.

Speaker 7

And then Eric, I just want to ask you one quick question on the store opening cadence. It looks like Q1 might be pretty light based on how much on the website. So any color on Q1 openings? Thanks.

Speaker 1

With regards to the overall, Ed, I won't say too much about deals and how we're going to comp the comp from prior year from a competition perspective, but we are and we feel like we're well positioned and we'll be able to annualize those special deals we had last year that were out there. So we feel well positioned. I just can't say much more about it, but the deal flow is strong enough that we feel good. We're not obviously consumables is a leading category for I think a lot of retailers out there. We're not much different.

Speaker 1

I think food and candy is working very, very well for us. And obviously consumable categories that we have in HBA and housewares is obviously a very strong performer and we're well positioned there. The deals the outsized deals are which really put us over the top and I think we're positioned here for this 1st, 2nd quarter without a doubt.

Speaker 2

And Ed, from a store cadence perspective, we're opening 5 in the Q1. We are planning out of the 2 closures, one of the closures is planned to occur in the Q1, but that could push out as we work through the turnover requirements with the landlord.

Speaker 3

Yes. And Ed, just to comment generally about the cadence, it is back half loaded, very similar to last year. And that really reflects momentum in the pipeline as we move through last year. We want to get to a point where we're not as back half loaded. We know we can execute the back half loaded plan based on what happened in 2023.

Speaker 3

So we have the confidence that we'll execute it. And as we look out in 20 5, we're going to work hard to get a better balance.

Speaker 7

Thank you.

Speaker 6

Thanks, Seth.

Operator

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

Speaker 8

Thanks and congrats on the strong results. I wanted to get into your Q4 gross margins, I think, may have been a record for Q4 certainly. And you noted in the commentary that part of that was related to lower shrink year over year, some of it was improved product margin and of course lower freight. But I wanted to dive in a little bit in terms of thinking about that impact on a go forward basis. One, do you feel like your shrink, you now have under control?

Speaker 8

I know that you've noted in the past that it's a real subset of your stores, maybe 20% or less that are causing 80% of the issues. So Eric, do you feel like that is in a much better spot? And any other commentary on just kind of loss prevention that would help? And then should we be thinking about Q4 gross margins is potentially a little bit higher than what they've been in the past?

Speaker 2

Thank you. This is Rob. From a Q4 gross margin perspective, we were very pleased with our performance. It was primarily supply chain fueled. We feel that the supply chain came in at I think it was in the range of 9% for the Q4.

Speaker 2

That's pretty consistent where we thought it was going to be maybe slightly better and we'll be able to improve upon that for next year planning supply chain costs for the full year in the range of say 9%. From a shrink perspective, shrink was a nice contributor to our Q4 gross margin. We started to see some improvement in shrink in the second half of the year. As we've discussed in the past, shrink is a trailing indicator. We count each one of our stores annually.

Speaker 2

So we only get a snapshot of how Shrink is performing after those counts. And it's nice to see that some of the additional efforts and resources we put against it have started to make some progress. That being said, we still are not back to where we were in the past from a shrink perspective and we still have more work to do. But given our where we landed Q4 in terms of gross margin, we're very confident with our 40% gross margin guide for next year.

Speaker 3

Jeremy, just to add a little bit more on shrink, as Rob indicated, our heightened focus on shrink over the past year. We did upgrade the teams in various ways. We're much more focused on internal theft in addition to external theft. And we've deployed a disproportionate amount of our resource on the 20% you referred to that's creating kind of most of our issue. And we would never say with 100% confidence that it's totally under control as it pertains to shrink.

Speaker 3

But we feel pretty good about heading into 2024.

Speaker 1

Hey, Jeremy, this is John. Just one last addition on margin. Just so no one gets ahead of us because we did have a very strong Q4. We're working to get back to a 40% gross margin from a long term algo for 2020 4. So I just want to make sure no one runs away from that number.

Speaker 1

It's not that easy to always hit exactly what we're trying to hit for the quarter with the changing costs we had and the overall buying environment we've been in. I still would ask everyone to stick with us on the 40% gross margin for 2024 at a minimum.

Speaker 8

Understood. And then just one other, the new, I wanted to get an update on the new DC in Illinois, and progress on the York expansion. And just understand the potential financial impact of that this year, timing on when you may have any drag related to that opening of the new DC in Illinois?

Speaker 3

Jeremy, it's Eric. I'll take the first part of the question. We are on track, on time to begin full operations in Q3 of this year. We actually began receiving in that building in Q2. All is going well.

Speaker 3

We have confidence that the start up will be successful. So feeling very good about this in this moment.

Speaker 2

From a financial impact perspective, we used to call the opening of a new DC, say, 20 basis points drag on gross margin. I would say given our bigger size, I would call that closer to 10 basis points now, but that's contemplated in our guidance in arriving at the 40% gross margin target. The other piece of it is there is an elevated depreciation that is alongside the York expansion and the Princeton distribution center, which is also contemplated in our guidance.

Speaker 3

I didn't comment, Jeremy. You're asking about York. It's so far behind me now. I'm not really thinking about it. We completed that expansion in the middle of 2023 and all is going well, successful throughputs where we needed to be.

Speaker 3

We have the expanded space, the ability to service additional stores.

Speaker 8

Great. Thanks for the color. Best wishes.

Speaker 3

Thanks, Jeremy.

Operator

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

Speaker 9

Good morning. Thanks for taking the question. Congrats on a nice quarter. I want to ask about the raised store target, the incremental 2 50 stores. So where are you finding the additional opportunity?

Speaker 9

Is it in new markets that you didn't think you could previously enter or great opportunity filling in existing markets? And do you anticipate that these stores will have a similar store productivity and profitability as the existing base?

Speaker 2

Hey, I'll take that part of the questions, Rob. From a new target perspective, I would say that there was certainly a bit of new markets in terms of the markets that came into our study in terms of demographics and population density. The way that we think about in where we sit today in our 5 12 store base versus our 1300 target in the future, About a third of it is a backfill opportunity into existing markets. 2 thirds of the remaining stores that we're going to open are in new markets. From the other aspect of your questions in terms of the model, we've found over 41 years that this model is exceptionally profitable and predictable in every market that we open and portable.

Speaker 2

So we have no doubts that we'll be as profitable in some of these other markets as we open as we are in our existing markets.

Speaker 3

Yes. Eric, just add it's Eric. Just add a little more color. As we said in our opening remarks, the urban sprawl that it was accelerated through COVID is certainly helping, sprawl into suburban and rural communities. But also in looking at our customer base, it's become more affluent and younger and that's also affecting the markets that we believe will be successful in as we move forward and the growth, the 250 store growth to our long term target.

Speaker 9

Great. And then you've talked about benefiting from trade down in recent quarters. Can you just discuss what the customer demographic mix looks like today versus a couple of years ago and whether or not this incremental trade on customers you've got is sustainable? And then does adding higher income consumers help you offer price products at higher prices that maybe you previously couldn't?

Speaker 3

Sure. Eric, it's Eric again. We're seeing trade down strength above $100,000 income, so we're seeing especially some strength above $150,000 And from what we've seen to date now over several quarters, retention does look good. Lower income customers are relatively stable. We under indexed lower income consistently over the years.

Speaker 3

So remember, we're we don't take SNAP and we're more discretionary assortment versus some others out there.

Speaker 2

The other dynamic this is Rob. I would add is that as we've deepened our mix into consumables, it's a high frequency, high visit business for us and typically a repeat shopper. So we feel that once we have you as an ongoing consumable shopper, those consumable shoppers are much more loyal, visit more often and are retained for a longer period of time. So we're pretty confident that the customer growth we've seen for last year will be benefiting from it for the next couple of years.

Speaker 9

Thanks and good luck.

Speaker 3

Thanks, Eric.

Operator

Thank you. One moment for our next questions. And our next question comes from the line of Matthew Boss from JPMorgan. Your question please.

Speaker 6

Great, thanks. John, could you just elaborate on trends you've seen post holiday going back and to the momentum that you cited? And then on the expanded vendor relationships and scale, where do you see the most opportunity across categories in the box moving forward?

Speaker 1

Yes. Matt, with regards to the trends post holiday, we've been and we've said a couple of times today, we have been very consistent. Q4 was a very consistent quarter for us and we continue to come out of the gate and everything just we've been executing and delivering consistent results. So we're not seeing a big change in our overall momentum in the business. So we're excited what we're doing here.

Speaker 1

So with regards to vendor relationships and expansion, it's not an expansion fully on new vendors. There's the increased expansion on existing vendors as well. So with regards to categories, we're seeing a pretty broad based right now. Obviously, with whatever is presented to us in the categories we sell, which is a very wide variety of basic hard goods. We're seeing a lot of mix coming through and a lot of building on existing relationships that are getting more categories to come in as well.

Speaker 1

So it's not something that I specifically call out. We're adding new vendors every day, but the big vendors are the ones who drive a lot for us. So we're very excited what we're seeing out there.

Speaker 6

That's great. And then Rob, larger picture, help us to think about bottom line flow through opportunity maybe relative to the roughly 11% operating margin guide for this year. If comps were to come in above the 1% to 2% plan, just thinking about gross margin relative to SG and A opportunity?

Speaker 2

Sure. So I think over time, there's certainly opportunity for us to continue to improve on our operating margin. I think gross margin, John hit the nail on the head. We're planning a 40 for year. We haven't been at a 40 for several years now.

Speaker 2

We're going to see how that stabilizes from a pricing and customer perspective and then evaluate any movement from there in out years potentially. From a leverage point perspective, you'd expect 10 basis points of leverage on SG and A as we comp above the 2%. So given the strong closeout environment and where we're at, we're planning 1% to 2%, which has benefited us over time because we get leverage as we do outsize comps. We're not going to shut the registers off. So should we deliver a higher comp, we'll certainly be able to leverage faster and get back to our longer term operating margin highs.

Speaker 6

Great. Best of luck.

Speaker 1

Thank you. Thanks, Matt.

Operator

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

Speaker 10

Good morning guys. If you look at SG and A per store, you guys hi guys. If you look at SG and A per store, you're essentially at 2020 levels and really only up modestly from 2019 even with this year's increases. That's a pretty stark contrast on your expense inflation versus what we've seen from most other retailers. And look, you guys have always run a tight ship, but what would you attribute that minimal SG and A growth to?

Speaker 10

And how should we think about that on a go forward basis? Thanks.

Speaker 2

We don't necessarily look at it on an average store basis because we are opening boxes that are different size. So the expense leverage kind of moves with that. Or expense dollars for that matter moves with that. We are hard at work on expense leverage. We are making the necessary investments we have to make in terms of payroll across all aspects of our business, the distribution center and the stores.

Speaker 2

And the goal of that investment is to get improved efficiency productivity. And that's what we're seeing come to bear in our results for this year and coming to bear in our guidance for next year.

Speaker 10

And is there anything we should be aware of in terms of wage changes for 2024, potentially even 2025 given what you know now?

Speaker 1

No changes at this time.

Speaker 9

Okay. Thanks guys. Thanks Scott. Thanks Scott.

Operator

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

Speaker 11

Hey guys, sorry for the background noise. I know it's practice to not guide any different than the way you did for the comp 1% to 2%. I just I'm asking because the last year or so has been unusually good for closeouts. Is there any scenario or is there anything you see out there why this business couldn't comp stronger? Is there any is it lapping a tougher closeout environment?

Speaker 11

But I know John talked about it being pretty strong.

Speaker 1

Yes, Sami, this is John. I would tell you there's no structural reason we couldn't comp stronger. We feel very good where we're positioned right now. We build our model on the 1 to 2. We always have that funny saying where we don't turn the registers off when we hit a number.

Speaker 1

So we're going to continue to try to drive. Deal flow remains strong. Our merchants are confident. So there's really nothing holding the stack. We're going up against some pretty good numbers.

Speaker 1

So I don't think you see outsized comps like you did this year. But I think we have opportunity and we can get it, we'll get it and we'll give the flow through to the investors.

Speaker 11

And then a quick follow-up thinking about the buying. 1 of the closed out grocers, we follow, they've been seeing much higher margins and we're not clear if that's on the buying or their markup. Have you seen any big step changes in categories over time? Is that usual? And could that happen for you going forward given the scale keeps getting better?

Speaker 1

We haven't seen any step changes in the grocery categories or what we call the food category or candy category. There's not been a large expansion in that area that we've seen at all. And that could just be us pushing value through to our consumers for loyalty and repeat business, but nothing real big there. But we do see Simeon and we have seen over the last couple of years there on certain deals or specific categories, we can have an outsized margin on the buy and still give the customer great value. And when we can, we do.

Speaker 11

Okay, great. Thanks. Good luck.

Speaker 1

Thank you.

Operator

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

Speaker 12

Good morning. Thanks so much for taking the question. So this is building upon a few of the earlier food inflation. Does this impact how you think about desired consumables penetration in the year ahead? Just think about the balance between the importance of this category with the potential for more freed up spending dollars for discretionary?

Speaker 1

Mark, a lot of the disinflation has been really around the, I'll call it, the grocery consumable category or the perishable or the cold food. We don't have any of that. We're really we're talking packaged goods, and goods in our stores. So we haven't seen a ton of disinflation there yet. But if it does come, there'll be opportunities for us from that perspective too.

Speaker 1

So that doesn't bother us. The loyalty that we've built with consumers have been very strong on the food and candy category and we expect that to continue in 2024. Yes, Mark, this inflation is disruption and that's good for us.

Speaker 12

Okay, fantastic. And then for a follow-up, just on the real estate environment, are opportunities from shuttered retailers like Bed Bath progressing in line with what you're anticipating? Just your latest thoughts there.

Speaker 3

It takes a little while, Mark, for that to work its way through. So the short answer to your question is yes, it does create opportunities. It is creating opportunities. With our model and our focus on 2nd generation sites that meet certain criteria, typically the spaces are vacant for a period time before the economics make sense to us and to the landlord to do a deal. So we do like what we're seeing out there.

Speaker 3

We like our chances. We like some of the vacancies that are being created by this disruption and some of the retailers that are out there that are shedding sites or potentially on the brink of BK. So that is good for us.

Speaker 12

Great. Thanks so much. Good luck.

Speaker 3

Thanks Mark.

Speaker 1

Thank

Operator

you. This does conclude the question and answer session of today's program. I'd like to hand the program back to John Swiggenferen for any further 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. Thank you. Have a great day.

Operator

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

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Earnings Conference Call
Ollie's Bargain Outlet Q4 2024
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