Ollie's Bargain Outlet Holdings, Inc. (OLLI) Earnings Call Transcript & Summary

Good afternoon, everyone. Thank you for joining us at the Goldman Sachs 27th Annual Global Retailing Conference. I am Chandni Luthra, the U.S. Discount Stores Analyst. And it is my absolute pleasure today to introduce members of the management team of Ollie's Bargain Outlet and to moderate our fireside chat. Ollie's is a highly differentiated and fast-growing value retailer, offering brand name merchandise at drastically reduced prices. The company has been growing at a rapid clip since their IPO in 2015 and currently operates over 360 stores across 25 states. Today, we have with us John Swygert, the Chief Executive Officer and President of Ollie's. John has worked in discount retail as a finance professional for over 27 years. He joined Ollie's in 2004 as the CFO and has been the CEO and President of the company since late last year. We also have with us Jay Stasz, Senior Vice President and Chief Financial Officer of the company. Jay joined Ollie's in 2015 and has been the CFO of the company since January 2018. John, Jay, thank you so much for joining us today.

Thank you for having us.

Thank you.

If I could start perhaps with a state of the union. So second quarter was an exceptional quarter for you, guys, and you managed to maintain extremely strong momentum in August, even as fiscal support dissipated. How should we think about any potential pull forward of demand in 2Q?

Yes. Obviously, Q2 was very exciting for us with generating a 43.3% comp. We're very excited about it. As most people know who follow us, we're not a comp story. We've always talked to our growth story. So for us to be able to deliver those phenomenal numbers without having the e-com presence is very, very exciting for us. It was a lot of hard work from every aspect of the business to be able to do that, but we saw some trends. We jumped on the trends right away, and we were able to capitalize on what people wanted and needed during that very, very difficult period of time. So the trends, obviously, ramp down month 1, 2 and 3 in the quarter. They had a slight deceleration each and every month as we would have expected. May was by far the strongest, and July was the weakest of the 3 months. But relatively speaking, they were all, I would say, world-class problems they have and great results that we were able to generate. So we're very excited, when we had our call a couple of weeks ago with regards to the announcement of our Q2 results, that we were able to announce that we're still trending in the mid- to high teens going into the month of August. We're not going to give a whole lot of more color past that. It wouldn't be appropriate to do so, but we're very excited where we're positioned. We think the consumer is responding very well to our offerings. Some of our inventory changes we made is resonating with the customer. We're excited where we're sitting today.

That's very helpful. If I could sort of talk about new customers that you've acquired through this period. So you spoke about getting new customers as others had their door closed. Could you throw some light on these new customer demographics, perhaps? What are they shopping? What are they looking when they come in your door? And then how do you think about your efforts to maintain this customer base going forward?

Sure. What we saw, we normally don't do this, but we were very interested to see what the demographic profile of the new customer look like, as we normally don't do this with our Ollie's Army database on a real-time basis. But we took the new customers we signed up, compared them to the light customers we signed up in the same period last year. And what we did see was that, that customer that we signed up this year was a little bit lower income level than we normally experience. They were between $20,000 and $40,000 income levels. Our average income in the Army is about $55,000. And their age group was a lot lower as well than what we normally see. They -- I misspoke -- their income levels were about $40,000. Their average age was between the ages of 20 and 40. We have a very widely dispersed population in our Army, and we skewed to the older demographic, about -- average age about 55 years old as well. But what we saw was the younger shopper came in more frequently to the store. Their shopping patterns and their shopping habits was very, very, very similar to the normal Army. We had a lot of PPE during this period of time. But I think that's what drove them into the store as we were communicating with them well. And then I saw we had to offer, they were buying a lot of different variety of discretionary items as well that we saw within the overall Army. What we did see was the major part of our Army -- not the major, a big part of our Army that's 65 years or older. They did not frequent to the store as much as they normally would, which made total sense during this period of time as the people 65 and older were to stay home and not shop in stores and whatnot during this period of time. We saw that same exact response from our customers as well than we would have expected. We're very excited to have the new customer that we attracted, and we believe with all the tools we have and the onboarding of the Army, the enlistment bonuses and the communication that we offer to the consumer, I think we'll be able to hold on to a lot of those customers and have them on a long-term basis in the Army.

That's great color. Go ahead, please.

And Chandni, yes, just to add to that, I mean, both speaking to Q2, right? We saw a very broad-based success across 20 of our 21 departments. The only department in Q2 that comped negative was our luggage department, which is not material. And when we talk about August, we're seeing the same trends. I mean with the only change maybe being that lawn and garden and some of the summer seasonal product is not as strong because we're basically out of those goods, which we should be at this time of year. So I think it bodes well in terms of having those results continue without the stimulus as well as that these new customers are continuing to shop.

That's very helpful. If I could perhaps shift focus to the closeout backdrop. That's sort of your core competency. Could you give us a sense of the backdrop -- the closeout backdrop that you're witnessing at the moment? What are the categories where deals are plenty? And which product areas do you feel you'd like to get a bit more aggressive on? And then finally, where are these deals coming from?

Sure. This is the #1 question we get from most investors is the closeout industry, the availability of inventory. And this is an area that we feel very, very, very comfortable to operate in. And we've seen a very broad-based offerings of closeouts in a period of time where people are still scratching their heads and wondering where they're coming from and how they're being created. Everything in our world remains very similar to what it had been prior to the pandemic. The closeouts are generated from excess inventory, package changes, whatnot. So that's inventory that's not sellable in the in-line retailers. And then that availability remains very, very strong. The categories we're seeing a lot of activity in and a lot of success in is bed and bath, housewares category. Sporting goods category has been very good for us. While it's not that big of a department, it has been good. So if you think about some of the retailers that were totally closed for several months, those categories are working very well for us today because of potentially canceled orders that may have come about. There have been a couple of bankruptcies that occurred as well. JCPenney being one of them, there's been some product availability coming out of those avenues for us. So there's been very strong deal flow that's been very broad-based as well. So we're not seeing any pockets where we're not able to sustain the inventory levels. So I'd tell you the couple of areas where inventory is definitely not as plentiful but it's still plentiful for us is really in the food category that we play in, which is snacks, cereal, packaged goods, had been a little bit tighter than we normally see. They're still out there, but they've not been as plentiful as they would be historically. Stores are still full of food, so we're not running out of food or short on food, but we're working very hard to keep that category in play. And a little bit on the HBA front and CPG companies are a little bit tighter. They're not -- there's not as much tide as there used to be out there, but we have a good stock right now, and we're in good shape there. I do think what we're going to see, and we've talked about the mega deals and availability of product coming heavy in, call it, end of Q4 into Q1 of next year. Right now, all the major manufacturers are busy producing and producing and producing to fill everyone's shelves back up. The likelihood of them overproducing is very, very heavy. So I would expect that we'll see those overproduced or overrun productions sometime early next year. They'll probably come out with excess inventory for us to be able to buy in a heavy levers -- heavier levels than what we're seeing and even pretty fresh goods from our perspective. So we're excited about it. And this is the natural way we see the progression occurring because of the, I'll call it, the whipsaw effect of trying to get all your inventories back in line and producing as fast as they can. They're going to overproduce as well from what people are seeing today.

That's great. And you mentioned mega deals. So if I could basically switch to sort of that aspect of the closeout business. You talked about that it normally takes some time for these big mega deals to manifest. You added time, but can you give us a sense of the opportunity when -- or rather the size of the opportunity that lies ahead of you, especially as we think about an exceptionally strong 2020?

Yes. We -- obviously, this is an area that we just know from our history that there's going to be big deals that are going to present themselves. I can honestly tell you, we don't know exactly what category they're going to come from today, what the size is going to be and when they present themselves. But history would tell us and our knowledge of the industry that it's going to come sometime probably late this year or early next year in categories that will be very strong for us in the categories we currently operate. It won't be a new category that we'll get into because of the mega deal. It will be an existing vendor that will have an existing deal for us or hopefully, multiple deals that we call mega deals. And I don't want to get people confused because we have plenty of large deals each and every day, but a mega deal may be a deal that's, call it, excess of $5 million or $10 million that we're going to hold in our distribution centers and maybe let them out to the stores over time because it's just too much for 1 shot to the stores. But those are not -- and while they're important, very important, they're not what's going to make the entire year for us. It's all of the deals and all the cake mix we see over and over again is what's going to really make it special. These will just be, call it, icing on top of the cake.

Got it. That's helpful. Switching gears to inventory. So 2Q obviously was exceptional, but do you feel that leaner inventories constrained the business in July and August? And how do you then manage the back half of the year? How do you manage in-stock levels going forward? If you could perhaps throw some color on this big debate across the industry with inventory that's going on.

Yes. I don't think our inventory levels impacted us negatively at all during Q2. I think, in fact, our inventory -- as most of you know, our inventory turns quite slow. We're turning, call it, 2.3x per year. So I think what happened is the leaner inventory has actually helped us because we actually cleared some inventory out of our stores. We got all of our top stock down off the top of the shelves and got the inventory in front of the customer to sell it. So I think what happened during the pandemic for Ollie's is it was actually helpful with the increased sales to make the stores look a little fresher and have more of a call to action for the consumer because it wasn't so full that they were able to see everything we had to offer for them. So -- and in our case, it's actually beneficial, take our inventories a little bit leaner because I think we're actually too heavy in the store from the customer shopping experience. I think that what we need to continue to maintain is a crisp store and not getting our inventory levels too high in the stores. And what we're doing right now is we're continuing to focus on that. And with the sales trends that we've experienced, it's not been too difficult to do that. So the biggest concern we have and what we're watching is if there was another major stimulus that came out and if it impacted the sales and the comp started to trend up in the 40s, that would be something that'd be nearly impossible for the company to maintain the inventory levels at this time of year and then keep the stocks in place. That would be a challenging period of time. I don't think it's going to happen from what I'm seeing and what I'm hearing thus far, but that'd be the area of concern that we couldn't chase the business that we got going that fast in the fourth quarter. The stores will be able to process that much goods.

Got it. Talking about the competitive landscape, there have been a lot of other retailers in the last 5, 6 months with 1Q and with 2Q sort of talking about playing more aggressively in the closeout landscape. How do you view competition through the cycle? Has anything changed from a competitive landscape standpoint for you, especially as you think about your ability to procure deals and the competitors sort of trying to be more aggressive there?

We definitely have heard rumors of competitors saying they're getting more into the closeouts. We have not seen it in any material respect. There's just been very few deals that we've seen with some of the discount retailers dabbling in them. But in terms of just sheer volume and taking of major deals out there, we've not seen any difference in the competitive landscape than what we had previously had. There's been no change to what we've seen in the marketplace.

Understood. Let's shift gears to the holiday season because that's been a major theme across this conference. Several retailers have hinted sort of basically a pull forward in the shopping calendar in 2020. How do you plan to approach the coming holiday season? What categories do you think will resonate more with consumers as a lot has changed the way people are thinking about retail and shopping? How do you view this promotional backdrop, anything different going into the back half?

Yes. I do think that our model is set up very -- to do very well in this holiday season. What resonates with the consumers as an Ollie shopper, people come to our store a lot for toys. They've been coming for toys for a big part of this year during the pandemic and then continue to come to our stores from a toy perspective. Kids are -- I must -- they must be asking for more toys and getting more toys and some educational toys that we've had have been selling very well. I think we're positioned well, and the books side of the business, educational books for Kids, has been doing very well. And I think it's going to continue through the holiday season. Trim-a-Tree and seasonal Christmas products, I think we're well set this year for that area. I think that people are going to spend more time at home, spend more money on decorating their houses, and I think we're positioned well to capitalize that. And then just being a general merchant and having a lot of things for the home is -- we have a high propensity of homeownership that comes to our stores. I think we're going to be able to capitalize all of our categories that people continue to shop for the holiday. So in terms of the promotional calendar, the change and shift to what people are going to do, we're not planning any major changes in our promotional calendar. As you guys know, we're every day low price. We're not a discount shop off of our current price. So we price very, very sharp off the marketplace. Our advertising schedule is just the same as it was last year. We're not making any big changes on our ad calendar, ad shifts. We don't have the challenges that some other folks might have. I think we're going to be positioned pretty well for Black Friday. A lot of people are trying to stretch out the holiday and create many multiple Black Fridays versus just one Black Friday. We think we're in a pretty good position there. Our stores don't get nearly as busy as some of the other mass merchants, and we think we can still practice social distancing and have a safe environment for our employees and our customers on Black Friday. The one change we are making to our holiday period is normally, we have Ollie's Army Night, which is one night per year, which is typically the biggest shopping day of the year, if not Black Friday. It's 1 of those 2 days, make up the biggest days. We're going to have Ollie's Army week, so we just cannot fathom having the people in our stores and the volumes that we put through in the 4-hour period from 6 to 10 p.m. on that Sunday. So we're actually making plans right now and working on our creative work that we're going to have Ollie's Army start on Sunday, December 13 and go through Saturday, December 19, that we're going to make sure the Army is aware that it's a weekly -- it's a week-long program to not have so much pent-up demand on that 1 day because we believe that would be inappropriate for our employees and our customers.

That's very helpful. And you talked about sort of change in your, basically, Ollie's Army Night and sort of stretching it across a week to sort of manage traffic. How do you convey that message to your customers, so that they know that this is something very different? Has your marketing message changed throughout the pandemic, if you've sort of focused on certain categories versus -- more versus others? Any thoughts around that?

Our marketing message during the pandemic early on changed and focused very, very, very heavily on PPE and essentials in terms of our marketing message, whether it be in print or on digital. So we spoke to the consumer that we had the products they needed for this difficult period of time, but then we also had our other items that we have, what I'll call discretionary. And I think that both of those together worked very, very well. We continue to communicate the PPE a little bit lesser extent than what it had been, but we are still heavily focused on providing what the customers need during this period of time. But our model continues to resonate with the home projects and people remodeling their homes, people doing things around the house. Our stores is set for them to really getting here, one here one-stop shop.