Ollie's Bargain Outlet Q2 2025 Earnings Call Transcript

Quartr
Provided by Quartr
August 29, 2024

There are 15 speakers on the call.

Operator

Good morning, and welcome to Ollie's Bargain Outlets Conference Call to discuss Financial Results for the Q2 of Fiscal Year 20 24. Currently, all participants are in a listen only mode. Later, we will conduct a question and answer session and interactive instructions will follow at that time. Please be advised that this call is being recorded and reproduction of this call in whole or in part is not permitted without express written authorization of Ollie's. Joining us on today's call from Ollie's management are John Swaggart, Chief Executive Officer and Eric Vander Voelk, President and Robert Helm, Executive 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 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 financial measures to non GAAP financial measures are included in our earnings press release. With that said, I'll now turn the call over to Mr. Swaggart. Please go ahead, sir.

Speaker 1

Thank you, and good morning, everyone. We appreciate you joining our call today. We are extremely pleased with our strong performance this quarter with better than expected sales and earnings. Our customers continue to respond to our amazing deals and we are executing our model at a high level. Our comparable store sales increase of 5.8% was well above our expectations and was driven by increases in both transactions and basket.

Speaker 1

Our room air and housewares departments were the 2 big standouts in the quarter, but we also continue to see strength in sporting goods, food and candy. Food, candy and sporting goods have been leading categories for some time, and these are all good examples of how strengthening our vendor relationships with major manufacturers continues to drive consistent product flow of compelling deals. Consumers are seeking value and this is driving growth in the discount and off price channels. The bigger retailers are gaining share and the larger manufacturers who supply them are competing for shelf space. Retailers are continuously updating their product offerings and manufacturers are supporting this by introducing new products in packaging.

Speaker 1

As a result, there is a constant availability of products and inventory across the supply chains and this provides additional opportunities in the closeout market. Consolidation on both sides of the aisle has led to more product flow, higher levels of excess inventory and a larger closeout industry. Some very large retailers have gone out of business in the past several years and the stakes for these for those remaining are getting higher. While the closeout industry continues to grow in size, the number of large scale buyers for this product continues to shrink. Our size, scale and over 42 years of industry experience is a real strategic advantage, and this is fueling our growth.

Speaker 1

Anyone can sell cheap products these days, but our true value proposition is selling good stuff cheap. We sell nationally branded products that people need and want at prices typically 20% to 70% below the fancy stores. Real brands, real bargains has always resonated with customers, and we don't think this will ever go out of style. We completed the quarter with 5 25 stores across 31 states. Our longer term target is more than 1300 stores across the United States.

Speaker 1

To support our continued growth, we have invested in people, processes, marketing, supply chain and information technology, all of which have led to better and more consistent execution. The proof is in the strength and consistency of our results. 9 consecutive quarters of comparable store sales growth, a return to a 40% annual gross margin and adjusted EBITDA margin in the low teens and the ability to opportunistically accelerate new store openings without sacrificing execution of the business. The $0.99 only store transaction was one of those opportunities and there are potentially others on the horizon. Our team is ready for such opportunities.

Speaker 1

The operational improvements that Eric and the team have made up and down the business has enabled us to be more nimble a more nimble organization, and I have never been more confident in our ability to drive profitable growth. We are well positioned to continue executing at a high level and winning into the future. We announced a number of executive promotions and appointments on our last earnings call that position us for continued long term success. With the team in place and the transition progressing, the plan is to pass the CEO responsibilities to Eric in early 2025. Eric will play a more visible role on these calls and investor events going forward.

Speaker 1

With that said, it's my pleasure to turn the call over to Eric.

Speaker 2

Thanks, John, and good morning, everyone. Our strong second quarter performance is the result of our great deal flow and the strong execution of our team. The process improvements and investments we have made in our people, supply chain, stores and marketing continue to pay off in the form of better productivity and consistent financial results. As John alluded to, this has also made us a more nimble organization capable of working through exogenous challenges and opportunities. The collapsing of the Baltimore Bridge was a tragic event that could have been catastrophic to our business, given this is one of our most important ports of entry.

Speaker 2

However, we were able to quickly reroute ocean containers with minimal impact to the business. The same goes for the recent rise in ocean shipping rates. We negotiated our annual contracts in early May, slightly below budget. Despite the short term spike in rates, we've been able to effectively move products while delivering against our gross margin targets. The startup of our 4th distribution center is another significant event that we have methodically planned and executed over the past several years.

Speaker 2

Located in Princeton, Illinois, this facility was open on time and on budget. We began shipping products to stores in late July and we are very pleased with its performance. This facility was a big undertaking and every associate who worked on this project deserves a huge congratulations and thank you. The new facility has a number of technology and productivity enhancements that will help us scale and increase productivity over time. This new distribution center sets us up for continued growth in the Midwest and we now have the capacity to service up to 7 50 stores in total.

Speaker 2

On our last earnings call, we talked about the acquisition of a number of 99 Cent Only stores and our ability to take advantage of this opportunity by prioritizing the opening of these stores and accelerating our store growth over the next 18 months. The majority of the 99 Cent Only stores will open in September and our team did a fantastic job of reprioritizing around these grand openings. Texas is a great market for us and one where we still have tremendous growth opportunity. These stores are the right size, located in good trade areas, have attractive occupancy costs and have an established base of value oriented customers. They will only strengthen our presence in key markets across the state.

Speaker 2

There's been a recent uptick in the number of store closures and we are positioned to make the most of these opportunities. This could take some time to play out, but we feel very good about our ability to shift resources and pursue opportunities as they present themselves. On the store operations front, we are testing a higher mix of full time associates in select stores. Like any other retailer, associate turnover at the store level presents challenges. Full time associates tend to have a higher vested interest, lower turnover, resulting in significantly higher productivity rates.

Speaker 2

With time and experience, associates become more proficient in how we operate, including how to best merchandise the stores. This can have a meaningful impact on store execution and the early results of this test are encouraging. On the marketing front, we continue to shift advertising dollars into various platforms. Our enhanced digital capabilities are helping us to reach new and younger customers and keeping our brand top of mind with existing customers. They are also allowing us to selectively target specific profiles such as previous customers of 99 Cent Only stores and customers of other discount retailers.

Speaker 2

Our expanding customer base is reflected in our Ollie's Army results. Consistent with prior trends, we are seeing growth in our younger customer demographic and retention of higher income customers. We ended the quarter with 14,500,000 active Ollie's Army members and sales to members continue to account for over 80% of total sales. To enhance the benefits of our Ollie's Army program, we recently announced the offering of a new co branded Visa credit card. We designed the card program that's tailored to our value based customers with unique features and benefits.

Speaker 2

These include higher approval rates, no annual fees and no late fees of any kind. Ollie's credit card holders will automatically be enrolled in our Ollie's Army loyalty program and receive $10 back on their first purchase at Ollie's, Ollie's Army points for every purchase made anywhere on the card and extra points for purchases at Ollie's stores. We are rolling out the card to customers on a state by state basis over the next year, beginning with Pennsylvania this month. The credit card program will help grow Ollie's army, build a stronger connection to our members and give us better insights into customer spending patterns. Before I turn the call over to Rob, I would like to thank the entire Ollie's Army team for their continued hard work and commitment.

Speaker 2

I am honored to be part of an organization that has a clear purpose and an amazing culture. We sell good stuff cheap and save customers money on the things they want and need for their everyday lives. This has been our business from day 1 and continues to motivate us each and every day. Rob?

Speaker 3

Thanks, Eric, and good morning, everyone. We are pleased with our 2nd quarter results, which exceeded our expectations driven by strong sales growth and disciplined expense control. Before we run through the 2nd quarter numbers, let me touch on a few key areas. 1st, seasonal sales were very strong in the quarter, particularly the room air category. We had a great in stock inventory position in air conditioners and fans and the warm weather throughout the quarter drove better than expected sales.

Speaker 3

The higher mix of AC sales generated strong increases in both average ticket and gross profit dollars, but put a little more pressure on our gross margin rate than originally planned. 2nd, our sales momentum built as the quarter progressed with our 2 year stack comps peaking in the month of July. We're pleased with the momentum ending the quarter into August, but we're also aware of the competitor liquidations taking place around us in the next month or so that could impact our stores in the surrounding areas. With that said, let me run through some of the 2nd quarter numbers. Net sales increased 12% to $578,000,000 driven by new store growth and a 5.8% increase in our comparable store sales.

Speaker 3

Our comp increase was primarily led by strong growth in transactions, but basket and average unit retail were also nicely positive in the quarter. Our best performing categories were room air, housewares, sporting goods, food and candy. Ollie's army membership increased 8% to 14,500,000 members and sales to our members represented over 80% of total sales. During the quarter, we opened 9 new stores ending with 525 stores in 31 states, an increase of 9% year over year. We remain pleased with the performance of our new stores, which continue to perform in line with our expectations.

Speaker 3

Gross margin decreased slightly to 37.9%. The 30 basis point decline from last year was primarily driven by a mix shift towards the room air and consumables categories. SG and A expenses were well managed during the quarter, decreasing 100 basis points as a percentage of net sales to 25.2 percent driven by leverage to fixed expenses on the increase in comparable store sales and disciplined expense control. Operating income increased 16% to $61,000,000 and operating margin increased 30 basis points to 10.5% in the quarter. Adjusted net income increased 16 percent to $48,000,000 and adjusted earnings per share increased to $0.78 Lastly, adjusted EBITDA increased 16 percent to $74,000,000 and adjusted EBITDA margin increased 50 basis points to 12.9% for the quarter.

Speaker 3

Turning to the balance sheet. Our balance sheet remains very strong and is a significant strategic asset, which provides us maximum flexibility to drive growth and maximize shareholder returns. We ended the quarter with $353,000,000 between cash on hand and short term investments and no outstanding borrowings under our revolving credit facility. Inventories increased 7% to $531,000,000 primarily driven by new unit growth. Capital expenditures totaled $38,000,000 for the quarter and were primarily related to the completion of our new distribution center in Princeton, Illinois, the purchase of the $0.99 only store locations, the remodeling of existing stores and the development of new stores.

Speaker 3

We bought back $6,000,000 of our common stock in the Q2 and ended the first half with $31,000,000 in share repurchases right on our targeted capital allocation. Turning to our outlook. We are raising our fiscal 2024 sales and earnings guidance. This raise flows through the upside in the second quarter and maintains our outlook for the second half of the fiscal year despite some near term potential impact from the liquidation sales from a large discount retailer closing stores. For the full year, which is a 52 week year compared to 53 weeks in 2023, we now expect total net sales of $2,276,000,000 to $2,291,000,000 comparable store sales growth of 2.7% to 3.2 percent gross margin of approximately 40% depreciation and amortization expense of approximately $42,000,000 which includes $11,000,000 that runs through cost of goods sold preopening expenses of approximately 17,000,000 operating income of $252,000,000 to $259,000,000 net interest income of approximately $15,000,000 and adjusted net income of $199,000,000 to $203,000,000 and adjusted net income per diluted share of 3.22 dollars to $3.30 Capital expenditures are expected to be approximately $104,000,000 which includes the $14,000,000 purchase price for the $0.99 only stores.

Speaker 3

Lastly, let me provide color on how we're thinking about the quarterly comp and store opening cadence. For the Q3, we are still projecting comparable store sales to be flat. While we have good momentum in the business, the flat comp assumption now includes some disruption from the store closing liquidation sales later this quarter. As a reminder, the Q3 will also have one less flyer that moves out of the quarter and into the Q4. For the Q4, we would expect comparable store sales to be slightly above the high end of our long term algo of 1% to 2% due to the shift of the flyer.

Speaker 3

For new store openings, we are still targeting a total of 50 new stores less 2 closures that we chose not to renew the leases. We expect to open 25 stores in the 3rd quarter and 12 in the 4th quarter. We prioritized the opening of the $0.99 only stores having already opened a handful with the balance expected to open in the next few weeks. With other real estate opportunities on the horizon, we are ready to shift resources towards accelerating unit growth and we'll evaluate opportunities as they become available. Now let me turn the call back over to John.

Speaker 1

Thanks, Rob. I would like to thank the entire Ollie's team for everything they do to make us great. It's the combined experience, passion and commitment from everyone that makes us successful. Our teams are doing an incredible job buying deals, taking care of our customers and keeping our stores stocked with amazing deals. We have so much growth ahead of us and in many ways we are just getting started.

Speaker 1

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

Operator

Certainly. And our first question for today comes from the line of Matthew Boss from JPMorgan. Your question please.

Speaker 4

Great. Thanks and congrats on a really nice quarter.

Speaker 1

Thanks, Matt. Thanks, Matt.

Speaker 5

Thanks for that.

Speaker 4

So John, maybe 2 part question. So impressive 2Q comp, 5% to 6% despite lapping the toughest compare of the year. I guess maybe could you elaborate on the cadence of trends through the quarter, maybe what you've seen so far in August? It seems like you're embedding some level of consolidation impact as the quarter progresses. And then second part to that question is just what do you see as the multiyear opportunity potentially from industry consolidation?

Speaker 4

I think both from a market share perspective, but then also what is size and scale doing to the business as it relates to relationships and potentially longer term to margins?

Speaker 3

Hey, Matt, this is Rob. I'll take the first part of the question, then I'll hand it over to John for the second part. From a comp perspective for the Q2, we were nicely positive in all 3 months of the quarter. As you recall, when we discussed, we had a really strong comp in the month of July last year. And so to exit the quarter with a positive comp against that big comp that we saw in July, we were very pleased with that.

Speaker 3

In terms of August, we've continued that momentum from July into August. We have had our flyer shifts that have impacted us in the month of August, but we're pleased with where we're sitting. We're running slightly ahead of plan. Our guidance of the flat reflects the potential for the impact of the liquidations happening at the tail end of this quarter, but is offset by the momentum that we're seeing right now in our business.

Speaker 2

Matt, it's Eric. I'll take the second part of your question. With the investments we've made in our infrastructure over the past several years, including the expansion of our Pennsylvania distribution center and the Illinois DC that we just successfully started up, we're revising our long term growth target from what was 50 to 55 stores to set the floor at 10% unit growth with the ability to accelerate that growth. We're excited about the real estate opportunities that are out there and on an opportunistic basis when the unit economics make sense, we will accelerate. We're not going to risk the continuing to execute our business and deliver profitable growth for this acceleration, but we are preparing for it.

Speaker 2

In terms of the market and the market share opportunity, we have a fairly meaningful share of wallet with some of the customers out there that or some of the retailers out there that are distressed. So we are excited about the opportunities in terms of market share. We're excited not only for real estate and people, but we're also excited for product and closeouts that come out of those situations as we've experienced in the past with other retailers that have gone out like Bed Bath and Beyond and Tuesday Morning, for example. So we're positioned well.

Speaker 1

And Matt, let me just add to that one little thing here. With regards to our size and scale and our ability to continue to foster and drive strong relationships with key vendors, I think that's a key takeaway as well. And we are the largest buyer of closeouts in the market today, and we continue to focus on that and I think we continue to have a stronger moat in our model that we continue to be able to be the 1st call and we're seeing a lot of activity from many different vendors out there in the marketplace where we can continue to do what we've done for many, many years.

Speaker 2

We continue to have great relationships and a very strong balance sheet and the vendor community appreciates that and we appreciate them.

Speaker 4

Great color. Thanks a

Speaker 6

lot. Thanks, Matt.

Operator

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

Speaker 7

Hi, guys. Good morning. And yes, reiterate, nice quarter. I wanted to ask you about the gross margin. As we think about this quarter, I don't know, can you maybe quantify how much the mix ended up hurting you?

Speaker 7

And then going forward, presumably, I mean, and obviously the AC stuff is not going to continue, but maybe the consumables do. You reiterated the full year gross margin target even though Q2 was a little light. So just curious as to what the offset to that would be and then how we should be thinking about this Q3 and Q4 cadence around that?

Speaker 1

Ed, let me take the last part and then I'll let Rob take the details that with regards to Q2. With regards to the full year guide at the 40%, we had some pressure in Q2 from the overall mix shift, not as significant as you might think in what you versus what your expectations would have been. So we believe that we're still well positioned to deliver the full year 40% gross margin because the business does change significantly in Q3 than Q4. So we feel like we're in pretty good shape to continue to feel confident about the 40% gross margin on a full year basis. And I'll let Rob kind of take you through Q2.

Speaker 3

From a mix shift perspective, we were coming into the quarter before we saw the higher penetration, the AC sales and the consumables area, we were planning for a modest expansion year over year. So call it a 38.4%, 38.5% in terms of gross margin. Essentially all of it is differential from our original plans to our actual results delivered is that mix shift.

Speaker 7

Okay. And then as it pertains to competitor liquidations that you see on the horizon, I guess how are you thinking about the impact? How difficult is that to estimate and how long does that last? I'm just kind of curious your confidence around the back half comp guidance with that sort of in the background.

Speaker 3

The impact of liquidation is somewhat unprecedented for us. We haven't seen a competitor closure like this in terms of share of wallet at least in recent history. Typically these compressed liquidations they're selling a large amount of goods into a short compressed window at high markdown rates. Initially the customers of the brand or the shop shop these liquidations. But once you get towards the end, you kind of get away from your core customer.

Speaker 3

So it's really hard to quantify how much of an impact this could have. We know that we've been gaining share over the last say 2 years particularly. So we like our ability to meet compete, but we thought it prudent to call it out for The Street in our guidance and be conservative and try to beat the expectations.

Speaker 1

And Ed, we're very well positioned. So there's a I call it a potential, but it's very hard to quantify, almost impossible to quantify, but it's a short term pain for a long term gain that we're going to experience here.

Speaker 7

Yes, understood. Thanks guys.

Speaker 1

Thank you.

Operator

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

Speaker 8

Hi, thanks. Good morning guys. Great results and the stores look great. On the competitor closures, I'll just say it looks like Big Lots is closing a bunch of stores, so maybe that's who we're talking about. You historically haven't called out a headwind from competitor closure.

Speaker 8

So I guess the straightforward question is, is the Big Lots store closures, are those a larger opportunity than previous store liquidations from other competitors?

Speaker 1

Peter, I think simply put the answer is yes. And we've not typically called it out. This hasn't been as directly located in our marketplaces that we believe could be impactful, but we don't know the answer. So we're just taking a cautious approach at it. We're not worried, but we thought it would be prudent to call it out.

Speaker 1

We do think there's obviously got to be some impacts. We don't know what they are at this point. But we think we're like I said earlier, we're well positioned. We feel comfortable where we're sitting right now and we'll be able to navigate through it.

Speaker 8

Okay. Very good. And then you did provide the gross margin mix impact from the air conditioners. Could you also provide us with maybe the comp lift that you got from that category in Q2?

Speaker 3

The comp lift was about 2 full points of comp on the 5.8% comp that we put this quarter.

Speaker 8

Very good. Thanks so much guys.

Speaker 6

Thanks, Peter. Thanks,

Operator

Peter. Thank you. And our next question comes from the line of Kate Shane from Goldman Sachs. Your question, please.

Speaker 9

Hi, thanks for taking our question. Just to ask another question about the liquidations that are taking place. Can you quantify how much of your store base is being impacted by this or how much overlap there is? And is there any kind of risk that the liquidation can pull forward demand where it could impact the quarters beyond Q3?

Speaker 3

Hey, this is Rob. I'll answer that question. There are 296 stores closing. We account for roughly 100 of those stores as located in our trade areas. So that's the quantification there.

Speaker 3

From a pull forward of demand, John referenced, it is unprecedented. We haven't seen something this big in recent years. But our intel suggests that there's not a seasonal assortment, not a high degree of toys sitting in these stores and that the go forward seasons they didn't buy in place in these liquidating stores. So we're hopeful that it won't impact the core Q4.

Speaker 9

Okay. Thank you. And if I could just follow-up, I know you talked about the performance of categories that drove the comp in the quarter, but we wondered about the performance of maybe some of your other bigger categories and what that's telling you about the consumer health and market share gains?

Speaker 1

Yes. Kate, we pretty much about 50% of our categories comped positive for the quarter. And as we said in the past, a lot of our fluctuations departmentally are deal driven and annualizing a deal from the prior year. So for instance, flooring was one of our weakest performing categories in the quarter, but we're annualizing a strong deal from last year. So it's not necessarily the reflection of the customer.

Speaker 1

The deal motivates the consumer. We're not seeing any real slowdown from the deals we're offering categorically that the customers are responding to. So we feel really good with what we're seeing from our customer shopping patterns in our stores.

Speaker 2

Yes. I think Kate also just on the health of the consumer, we're actually seeing strength across all income segments this quarter. Our strongest growth is coming from the lower middle income segment, which is the 40,000 to 60,000 household income segment. And we're continuing to see retention of higher income customers at that 100 ks plus level. So we're very happy with what we're seeing in terms of the overall strength of our customer.

Speaker 9

Thank you.

Operator

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

Speaker 6

This is Josh Young on for Scott.

Speaker 3

So you talked about SG and A being well controlled. But based on the new guidance, it looks like flow through is a little limited on the higher sales. So could you just give us some

Speaker 6

color on how you're thinking about that?

Speaker 3

We were really pleased with the flow through for this quarter. We leverage 100 basis points. Our 5.8% comp would attribute roughly 40 basis points of leverage. So we gained 60 basis points of other leverage within our expenses. We were able to see some efficiency in advertising as we continue to shift from digital to print.

Speaker 3

Print to digital. Yes, print to digital as well as some favorability in store payroll for some of our early optimization efforts in those initiatives.

Speaker 6

Okay. That's helpful. And then you mentioned strength across kind of the different cohorts and gaining some share with higher income consumers. Just curious within that group how sticky you think those customers are in the longer term here?

Speaker 2

We're seeing a couple of quarters of trend that they look to be sticky, but it's only a couple of quarters. So we've seen a pretty sizable trade down over a number of quarters and now we're seeing good retention. We measure retention over a 2 year period. So we haven't lapped the trade down impact yet, but we like the trend we're seeing a lot.

Speaker 6

Got it. All right. That's helpful. Thanks guys.

Speaker 1

Thanks, Josh.

Operator

Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question, please.

Speaker 10

Good morning and congrats as well. I want to talk about the real estate opportunity ahead. When we think about some of the big lots closures that are happening and additional ones may happen on the horizon. I was hoping you could talk a little bit about your bandwidth to perhaps take on opportunistic real estate opportunities. And how many stores would be too many?

Speaker 10

At what level do you worry about your ability to source these new stores? How much could you take them on and perhaps tuck them away for the next couple of years? Just how are you thinking about things if we do find ourselves with many more store locations that might be opportunities for you all?

Speaker 1

Yes. Brad, I'll answer it and then I think Eric will probably add some to it. With regards to how many, I don't know at this point in time how many we think we could take and tuck for a year, 2 or 3 year period. I don't think that's very feasible. I think that's riskier than it is beneficial.

Speaker 1

So we would probably not be interested in trying to do something of that nature. It just adds a lot of pressure on our overall core business and our ability to run it. So trying to carry the dead rent of stores for a long period of time is not beneficial to us and the way we look at it today. In terms of our ability, how many we could open and accelerate, I'll let Eric take that piece of it.

Speaker 2

Yes. I think just to follow-up on dead rent, and we're considering every angle on this. So it really depends on how attractive the occupancy costs and what the sort of the penalty of dead rent would be. The cadence of the store openings is critical to acceleration. So if there's enough inventory of stores out there that we can get at, opening a cadence that's a little bit more even quarter to quarter gives us the ability to accelerate rather substantially.

Speaker 2

We're very aggressive in the process of any surplus locations that are out there, any announced closures. We've been able to navigate now the bankruptcy process through our experience with Bed Bath and Beyond as an example and 99¢ only. So we're becoming very proficient at this. We're not setting necessarily a limit on how many stores we would open as part of the acceleration. But we do believe it can be meaningful and we will ensure whatever acceleration we ultimately commit to based on opportunities in front of us that we do not risk the execution of our core business.

Speaker 10

That's really helpful. And you talked about the trends and how the consumer is performing. But as we look to the all important holiday season, could you talk a little bit about perhaps any merchandising opportunities that you have and any nuances that you're seeing and how the customer shop in your stores today as it relates to how 4Q may play out?

Speaker 1

I think, Brad, that's probably very speculative for us to comment on. I would tell you, we believe we're very well positioned for the holiday season. Our merchants have done a great job getting the inventory that we believe is right for the customer at the right values. So I think we're set to win. But I think it's a little too early to speculate on anything else at this point in time.

Speaker 2

Yes. I would add that we're very excited about our seasonal assortment and our toy assortment moving into the holiday season. And we have some evidence of early selling on the seasons that are kind of the prelude to Christmas. And we really like what we're seeing and it's getting us more excited about what's flowing into stores. We'll start setting Christmas actually next week.

Speaker 2

So excited to see what comes out of that business seasonal and toys.

Speaker 10

Very helpful. Thanks so much.

Speaker 1

Thanks, Brad.

Operator

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

Speaker 11

Hi, thanks. Good morning. You talked about more retailers are closing stores and the closeout market is growing and your scale is improving. Are you seeing deeper deals, bigger deals with your existing vendors? Are you adding new vendors with new categories to the store?

Speaker 11

And with big lots of store closings going on now, have you been able to capitalize on any of the vendors that were with them that you didn't have relationships with previously?

Speaker 1

Eric, I'm only going to comment that I would tell you we are seeing a great deal flow. We're seeing some additions to our offerings from new relationships with vendors. And the deals we're seeing out there are very compelling and we're very excited with what we're getting out there.

Speaker 11

Great. And you still haven't commented on shrink. I think it was running like 100 basis points ahead of sort of pre pandemic levels. Just curious where that is now? And then as that sort of normalizes, could that be gross margin upside to the 40% over time?

Speaker 11

Or would you likely reinvest that back into the business?

Speaker 3

Hey, Eric, this is Rob. Shrink's pretty much hit a plateau. We've kind of been at this level for a bit now. We're working hard as possible to mitigate it. We've talked about it.

Speaker 3

It's a local hyper local problem and we're putting resources into those hyper local markets to mitigate it. But so far, we've been pretty flat to where we've been over the last couple of quarters. From a tailwind perspective, our model has always been to deliver a 40% gross margin and then to reinvest in price above that. At this moment, as competitors are struggling and consumers are pinched, we would continue to do that in the near term.

Speaker 10

Great. Thanks a lot.

Operator

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

Speaker 12

Thanks. And I'll add my congratulations on the strong results. I want to come back to the real estate question and think about in terms of if you accelerated real estate plans because there are 300 roughly 300 locations closing. You noted that only about a third of them are in your current trade areas. You have just opened up a new DC in Illinois.

Speaker 12

In terms of thinking about where you might go after locations and you've had some success or hopefully have some success with the 99% only, would you potentially add into new trade areas in these real estate opportunities that are coming or would you exclusively focus on areas that you already currently have markets in?

Speaker 2

Jeremy, it's Eric. Yes, kind of sort of, like we're committed to contiguous growth. So contiguous states will consider to our current trade areas. We think given the size of the opportunity, we should have a meaningful opportunity in our current trade areas. And there are plenty of locations that will make sense in existing trade areas.

Speaker 2

In general, even in a state like Pennsylvania, where we're most saturated, we have opportunities to open additional stores. So our focus is on existing trade areas, but we're considering contiguous states.

Speaker 12

Got it. And just a quick follow-up to that. I know it's a bit forward looking, but in terms of thinking about CapEx budgets and the potential range of outcomes that you might have in 2025, Now that you're past the DC opening, what would you suggest was kind of the range of potential CapEx given the potential for real estate acquisition?

Speaker 2

It's really hard to tell

Speaker 3

in this moment. We don't have a lot of information besides the 296 closures that have been reported. There's the potential for other things to happen. So we've got to really see what happens there and then respond to it. I'd say broadly our CapEx assumption for next year based on what we see today is probably 2.5% of our net sales somewhere in that range.

Speaker 3

But we certainly have the financial strength to be able to flex that up if required.

Speaker 1

And Jeremy just to add, I don't think it's prudent to speculate on what could be. That's not how we operate the business and how we plan. So it's great to talk about, but it's not something we're going to commit to or speculate at this point in time either.

Speaker 12

Great. Appreciate the color. Best wishes.

Speaker 6

Thank you.

Operator

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

Speaker 13

Hi, good morning. Thanks for taking my question. I just wanted to ask quickly on the $0.99 only stores. I know you mentioned you've opened a handful of them. Just curious how those have been performing, if they're in line with expectations and if there's any update to the economics of those that you previously laid out.

Speaker 13

Thanks.

Speaker 2

Sure. Hi, Melanie, it's Eric. We only have about a week behind our belt on a couple of stores in a day on some others. We've opened half of the 99.10 stores to date. And we took a little bit of a different approach with this since it was an acquisition and we were on the hook for the ownership or the rent immediately.

Speaker 2

We actually soft opened these stores and haven't run our grand opening event, which will run in late September. We're running a pretty big event across the entire Houston market to celebrate opening these stores, including some of our existing stores in that market. So the answer is it's too early to tell, but we're pretty excited about the results. It seems we're getting a very meaningful positive response from customers. We're also excited and I mentioned it in my opening remarks about our ability to market to the previous customers of 99 Cent Only Stores and get that message out to them through our various digital channels with our enhanced capabilities in that space and let them know that we're here now in that former 99 sit only space.

Speaker 2

And so far we like the results we're seeing there as well.

Speaker 13

Great. Thank you. And then if I can just follow-up on any trends you saw by geographic region during the quarter? Thanks.

Speaker 3

In terms of region, we were pretty strong across the board. I would say that we if anywhere to call out significant strength, we probably saw the most strength in our southern states in Texas and those areas.

Speaker 9

Thank you.

Speaker 4

Thank you.

Operator

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

Speaker 14

Good morning everyone. I wanted to ask on product mix and gross margin through the back half. Seasonal and toy, I'm sure that's always a decent part of the mix as you get into the 3rd Q4. What is the implication on gross margin? And is there any expectation that it's a good guy or a bad guy based on the volume that you expect within each category?

Speaker 14

And if I heard correctly, I thought maybe I heard some gen merch categories hurt the product mix this quarter. Can you just clarify that and why would that be the case?

Speaker 1

Yes. Simeon, it was the margin impact for Q2 was impacted from the room air, which is predominantly air conditioners, which has a lower margin profile than a lot of other categories. And we call that consumables, which would have been specifically related to more on the cleaning front. So that normally carries a lower margin profile as well. So those would have been a slight drag to what we normally would have reported to you in Q2.

Speaker 1

Definitely seasonal in toys would have a higher margin profile than those 2 categories. So there's not a drag expected from our seasonal categories whatsoever in Q3 and Q4. But we'll continue to drive the business. We don't expect the same pressures we saw in Q2 to replicate in Q3 and Q4 from the categories perspective.

Speaker 14

Okay. That's helpful. Can I ask, are you seeing signs of the consumer strained at all? I know you mentioned you're seeing strength from every income cohort, but are there any signs based on the categories in which you're selling, the consumers hurting more and then you're just taking share as a store and as a channel?

Speaker 2

Okay. Go ahead, Eric. Simeon, it's Eric. The only sign of weaknesses in big ticket categories, which has continued now for, I don't know, a couple of years. So we have pouring category, mattresses, furniture.

Speaker 2

There's weaknesses in those categories and I think it continues to be weak across the entire industry. We offer extremely strong value across all categories and the strength of the value resonates across all income groups.

Speaker 14

Okay. Thank you.

Speaker 1

I'd just add one thing to it. I mean, I think that's why we're winning. We're definitely I think there's the consumer stress, but that's why Ollie's is here to serve and we're serving them very well.

Speaker 14

Appreciate it. Thanks. Good luck.

Operator

Thank you. And our next question comes from the line of Paul West from Citi. Your question please.

Speaker 5

Hey, everyone. This is Brian Sheetham on for Paul. I was hoping we could dig in on the Ollie days liquidation event in 2Q that I think you normally run. How did that compare to what you're expecting? Did you see the consumer gravitate more towards those deals?

Speaker 5

And did that have any impact on gross margin in the quarter relative to your expectations?

Speaker 3

I'll answer the first part, but then I need you to repeat the second part. From an Ali's Day events perspective, we were pleased with Ali's Day, just like we were pleased with the comp in the quarter and our results. So strong events again this year and no concerns there.

Speaker 2

No unexpected impact on margin, I think is what you're getting at. So

Speaker 5

And what was the second

Speaker 1

part, Brandon? Yes.

Speaker 5

It was around gross margin. If there was any impact on gross margin from that event potentially being stronger than you anticipated. None. Okay. I was hoping if you could expand on the co branded credit card you mentioned you're launching.

Speaker 5

Anything you'd share on the terms there? Any margin impact? Did you start to roll that out or marketing expense consideration?

Speaker 3

Sure. This is Rob. We're excited about the card. Our expectation is that the cardholder should we should see a modest uplift in their baskets and their spend similar to how we see an uplift for our Ollie's Army customers. We'd expect for that to be nicely accretive to our comps.

Speaker 3

We are rolling it out over the course of the next few months. So we're expecting very limited impact to fiscal 2024 and should have some data to better guide how we're thinking about it for 2025. From a margin implication perspective, we'd expect for it to be slightly accretive to our margin rate. If the card features a royalty and membership bonuses with the card company, which is drive that accretiveness.

Speaker 2

What we're most excited about and I mentioned in my opening remarks is the value proposition of the Ollie's Army customer. It's enhanced value of the program itself. We believe it's going to attract new members as well as a result of the strength of the offering.

Speaker 5

Got you. And if I could just ask one more. You mentioned that you are looking at full time employees versus part time employees. Is there a potential for that to be a potential headwind or that be a tailwind if you're converting more to full time and getting more productivity out of your associates?

Speaker 2

Yes. Brandon, it's Eric. We look at it more as a tailwind, but it's really about better executing the store, which is going to drive top line over time. It's not necessarily an SG and A related initiative, although it could be slightly accretive or perhaps it offsets any wage pressure that we may see in the future. But we look at it as more execution focused because that full time associate is more committed to us, more career oriented, looking to advance in our company, turnover is significantly lower for full time associate versus a part time associate, it results in better execution.

Speaker 5

Thanks, Vince. Thanks and good luck.

Speaker 2

Thanks, Brandon.

Operator

Thank you. And this does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. John Swigert 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 and have a great day.

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Earnings Conference Call
Ollie's Bargain Outlet Q2 2025
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