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

Good afternoon, everybody. It's Randy Konik, lifestyle and growth platforms analyst at Jefferies, here again towards the end of day 2 for our Nantucket conference. I hope everyone is having a great time, learning a lot, getting a lot of insight. And again, we look forward to seeing everybody in person in 2022. One of the themes we keep pitching with our investors is the idea of very simplistically value in. And in times of economic disruption, we see consumers gravitate towards businesses that provide a lot of value. And one of those businesses that we think very highly of and have a lot of runway of growth ahead of it is Ollie's. So we're pleased to have Ollie's management with us this afternoon: John Swygert, the company's CEO; as well as Jay Stasz, the company's CFO. And we're going to go through a discussion on some points and questions that we have for the company, and then we'll see if anybody has any questions as well. So with that, I want to welcome John and Jay to the conversation. How are you guys doing today?

Great. Thanks, Randy.

I'm good, Randy. Thank you.

Great, guys. Great. So thanks again for joining our conference this year. I really appreciate it. So just quickly, I want to start off by getting your perspective on the consumer environment right now. What is the consumer? How strong is he or she? What's been changing in COVID and coming out of COVID? Just kind of get your thoughts on just the overall level of the consumer and what they're doing right now would be really helpful. Thanks.

Sure, Randy. With regards to our view of the consumer, the consumer for us has been extremely strong during COVID and now coming out of COVID. We've been excited from what we've seen. What we're seeing is obviously, with the change in lifestyle, folks have been visiting models like ours who have a lot of stuff for the home, which has been working out very well for us. The consumer has definitely been reacting to the free stimuluses that have been provided by the government. They have definitely taken that money and put that to work in our retail sector and responded very well. Moving forward, I think the consumer is going to be in pretty good shape. I do think there's the fears of possibly of inflation are real, which could impact them. We are continuing to see gas prices tick up a little bit, which is going to impact people and their wallets as well. So -- there are some things happening out there in the marketplace that I'll say, post-COVID and post-stimulus, could be a little bit of headwinds for folks. I think for us, we're positioned well, like Randy said, in the value sector in the way we could bring our deals to market. I think we're positioned very well to take advantage of that, and I think that will bode well for us in the long term. So we're excited about it.

That's great. And then kind of speaking to a question we always get is, let's get your latest thoughts on the deal environment. Kind of give us some perspective on the supply, changes in supply, how your relationships are blossoming. Just anything you can kind of give us there would be super helpful.

Yes, Randy. This is probably one of the most least understood areas of our business. I think the closeout sector has been very hard for folks to understand since we've gone on this journey going public. The closeout sector is a totally different sector than everyday value goods or production goods. That is something that folks can't get their hands around when there's short supply of product from the in-line retailers. That doesn't really have anything to do with us or impact us. There's different operating arms within these mass merchant companies. So I would tell you that we have had no issue sourcing supply and sourcing products. Our merchants are being very picky and very particular by what they're picking. They're getting great values, great brands at great prices for our consumers. So we're not seeing any type of headwinds in being able to source our closeouts as we have done in the past. Our vendor pipeline is full. The major manufacturers are providing us with a lot of great deals. There's categories that I would have thought last year, we're going to be short on and not have a lot of supply. But those categories have been very, very plentiful, and we're excited from what we're seeing out there. So the more challenging piece out there we'll probably get to is more on the supply chain, transportation, distribution center networks. Those are the ones that I think we as retailers are struggling more worth -- more with rather than getting our product. Timing of shipments have been an issue for folks. And I think that disruption probably causes opportunities for us in the future.

Very good. And I think on the last earnings call, I had asked you a question specifically around product categories, maybe talking through where your product categories have changed over recent years and also asked you about some categories you may want to get into in the future. So maybe just rehash that a little bit for those that may have not have listened to that earnings call and any other thoughts around category development and evolvement that you're thinking of.

Sure, Randy. Just so we're all clear, in the closeout world, we kind of follow the deal. We're not creating, we're following what's available in the marketplace. But talking about strategies and where we see the model going, I would tell you, it started in 2014 when we had the introduction of K-Cup coffee, which really catapulted us and really changed the overall food category that we operate in. That was a -- I'll call it a once-in-a-lifetime arena that we entered into and we really have done a great job developing that category within our box, and we continue to sell quite a bit of K-Cups each and every day. Where we're working on right now strategically and what we're looking to do is probably do some more investments in the pet category. I mentioned that, Randy, on the call in terms of where we think we have opportunities. Pets is a market that is a very large market. I think it's over $100 billion a year market with other retailers. So I think we can take a little bit of share there. And it's a very small component of our business today. It's just north of 2% of our sales. I think we can turn that into 3% or 4% of sales, which would be a nice little lift in our business. I think we can shrink our -- what we call our furniture department a little bit. There's a lot of imported furniture. And with the increasing pricing pressures, I think we can go away from that without hurting our business at all and probably drive incremental sales volume with pets.

Very helpful. And then I guess moving to Jay, this next question. We always get asked what's kind of a normalized long-term margin look like? We don't need to get into specific targets or anything, but just would love to get some sense of how you think about different puts and takes to some margins or potential BP leverage on a recent DC that you put up in the business. So just kind of curious on how you think about your margins for the year.

Yes, Randy. It's a question we talk about a lot, especially now. And from a gross margin standpoint, like we said on the call, I mean we're trying to stick to the 39.7% gross margin target that we gave at the beginning of the year. We've got a long way to go still in this year in the supply chain pressures, both with the DC and the imports aren't abating at this point. But we're going to continue to work hard. And the puts and takes on that are on the merchandise side, right? If we can buy better, if we can take our prices up a little bit, or maybe we're a little bit greedy on the margin to date. But then going down to the bottom line, to the operating margin, and as we think about the long-term algorithm, I mean, our operating margin on a normalized basis is right around 13%, which is very strong. And I think going forward, we're going to continue to grow the top line. Like we've said, we're going to cap it, probably at 50 to 55 stores in the near term. Maybe that evolves in the future once we get our hands around that. But I think we can have expansion in that operating margin. And not so much from the gross margin, because we're going to continue to target a 40% on a long-term basis without a DC impact. But we can get leverage on our SG&A like we've had in the past. And as we grow the top line, also, our preopening costs and our depreciation, we'll get some leverage there just as the top line gets bigger. So that's where the expansion of the operating margin will come from.

Very helpful. And I think really recently, you had a hiring event off of a national hiring event, but -- or about to have one. I'm just curious on what you're seeing in the labor market in terms of availability. And also just kind of cost trends that are interesting that you have to kind of think through in the business right now.

Yes, Randy, last year, we had our national hiring event for Ollie's. Last week -- sorry, not last year. Last week, we just had it. And I would say it was very successful. We went to market looking for store associates as well as distribution center associates, and we're very, very pleased with the turnout. We had north of 2,500 applicants come into our stores and our DCs for this event, which was, in our opinion, very, very successful. We had seen some nice activity in our distribution centers, especially in Georgia and Texas, which we were looking to hire the most people, and we were successful in doing so. But I would tell you the availability of the employee has definitely been challenging. I think with the unemployment -- federal unemployment subsidy, it's made people want to just stay home and not work. But those are changing in certain states. And we're seeing that free up in certain states. And we're excited to get people back to work, and there's a lot of opportunity not only in Ollie's but a ton of other retailers and other businesses that are out there. So we're looking forward to getting the workforce back and getting to full throttle again.

Can you just expound on that a little bit? So would you say then in like Texas, you saw it much easier to get the employees you needed or an abundance of applicants versus other states? Just expand upon that maybe a little bit of relative that you saw.

Yes, Randy, in the states that are starting to end the federal unemployment benefits, we saw a higher number of applicants going into our stores and our distribution centers without a doubt. So the folks that are still getting full unemployment benefits, I think they're going to be a little bit delayed until those run out and they're no longer available. We'll get them back to work after that.

Got it. Okay. That's super helpful. How about the Ollie's Army? I mean, one thing that's very powerful about your business model is that this Ollie's Army accounts for a disproportionate amount of your sales volume and they're sticky and they're repeatable customers, dependable or loyal. So just give us some -- maybe again for those who may be less familiar with your story, just give an update on where the Ollie's Army number is today, where it comes from maybe over the last couple of years. And then different things you've been doing to incentivize or kind of continue to, kind of, focus on the Army and things like that, that are helping your business in the current state and into the future. Thanks.

Yes, Randy, as we reported at the end of Q1, we have about 11.9 million active members in the Army. And when we define them as active, they must have been in our stores within the last 24 months or less. They made up over 78% of our sales, which is a huge number relative to overall sales volume. Historically, we were about 70% of our sales were Ollie's Army, went up to 75%. Now it's up to 78%. So we're seeing a nice creep up on the Ollie's Army membership spend. Ollie's Army members spend about 40% more per visit than a non-Ollie's Army member. Where it is today, an Ollie's Army member spends right at about $41 per visit versus a non-Ollie's Army member spending about $29 per visit. So it's a big -- a much larger spend for that member who knows us. The overall traction we have with the Ollie's Army member, our best customers, which mean they shop 2 or more times per year, they shop an average of 8x per year on our stores. We have a very high retention rate in our Army, somewhere right on 95%, 96% retention rate in the Army, which we think is very, very impressive from an overall perspective without having a membership fee or anything of that nature. We have a program -- basically, it's the more you spend, the more you save. Very easy and very simple to follow. We have every $250 you spend, you get a 10% off coupon on your next purchase. We have basically 4 events a year that are specific to the Ollie's Army member. We send out 3 postcards every year for an event in February, an event in May and an event in November -- October to November. And then that one night, for Ollie's Army Night, on the first or second week of December on Sunday night. So those are the -- it's a real simple program to administer. But we're actually -- I think we're getting a lot better at it. We're using some more tools to go digital and to be able to speak on more one-on-one with the Ollie's Army shopper and make it a personalized communication with them. I think that will pay dividends for us in the long run.

Yes. And one thing that's interesting to note is that your comps have been strengthening while the penetration or the percent of total volumes on the revenue by the Army is increasing. So is that a function of the Army members having more frequency of visits in your stores? Or is it a bigger basket size? Kind of what's going on there?

Randy, what we've seen is really the larger basket size and the increased rate of sign-up. Our sign-up has outpaced our store growth and then the overall spend. It's not more frequency. We actually had, I'd say, almost just the opposite effect last year during COVID. There was less visits and more spend by the Ollie's Army members, which makes total sense to us because folks who are concerned about their safety, they made less visits in the stores and they spent more when they came in.

Got it. And then anything you're thinking about changing or looking to enhance the Ollie's Army membership more? You gave some good color on the discount they get on different levels of spend. The more you spend, the more you save. So any other kind of things you're thinking about to enhance that relationship further?

Yes. I think right now, we don't have any immediate plans to make any changes to the program. We think it's working very well. As I said, 78% of our sales is a pretty high number relative to the overall mix. The program today, we give them -- we -- we're not big on discounts. We already have great values in the stores, so we don't try to give much more away. We do reward them for every $250 in spend, they get 10% off coupon on their next purchase. The events we hold every year, we think we've got that sauce working right. And I don't think we're making too many changes on any type of discounts. We are going to try to speak to them more smartly through digital and speak to them more on a regular basis, offer them the ability to text and whatnot. But no real big changes to the overall baseline of the program at this point.

Got it. I see some questions that have come in on the Internet here. So why don't I just get through a couple of these. So first one, it was a little lengthy here, just bear with me. It says, historically, you've eschewed any online version of Ollie's because you don't want to undermine your suppliers and the treasure hunt that comes through visiting the store. But with some growth in online competition, would you consider revisiting this? And then second, you've had incredible same-store sales comps declines last year through the peak of the pandemic. Will you see if any -- as a long-term impact of that bulge in spending and attendance, will it lead to more Ollie's Army members, more occasional shoppers, changing your product range or no long-term impact?

That is a long question, Randy. I'll try to remember to answer all the questions that went along with it. But in terms of e-comm, that's something we've been asked about a lot. We don't ignore it. We do pay a lot of attention to e-comm, but we are very sensitive to the closeout industry and why we get a lot of our deals with the major manufacturers. A lot of the deals we get from the big names want it to go away quietly. The worldwide web is not a quiet way to get rid of their products. So at this point in time, we're probably not going down that road. We do pay a lot of attention to it because -- if there is something sexy, I don't know, being able to sell a Bissell vacuum cleaner to someone in California. But we're just not there yet. And we know there's a lot of investment that's got to take place. We're laser-focused on our store growth. We have a ton of white space. We're just north of 400 stores today. We're actually at 408 stores today, and we've got runway to go to 1,050 or more. So we're really going to focus on the brick-and-mortar. There's a real barrier to entry on the closeout world. Could you do some of it? Sure, you could. But right now, we're just -- we're paying attention. We're not ignoring it, and we do think it's important. But today is just not the right time for us to embark on the e-comm with closeouts. With regards to -- what was the next question, Randy? I forgot the other one already.

Yes. It's just about the -- you've had some incredible comps. What do you see, if any, as the long-term impact of that bulge in your spending? And then just basically trying to figure out like, are you going to see more Ollie's members as a result of this big push during the pandemic, more occasional shoppers? Are you going to change your product range or you don't really see any difference in the long-term impact?

Yes. I don't think there's any real major change in the product offerings. I think we have the right sauce there. With regards to our long-term algorithm, and I think that's where they're going with it, is we're going to stick to the 1% to 2% comp. We think that's the right way to build the business, the right way to plan the business. We always tell everybody, we don't just turn the registers off when we hit our comp. We do as good as we can, and we continue to push and push and push. But we think that, that's the right way to run the operation. With regards to the -- there's credence to the incremental sign-ups on the Ollie's Army members. There probably is. Is there something that's going to probably come out of it? I think there'll be some positives that will come out of it, without a doubt. But I don't think we're going to change how we build up our plan and our expectations. I'd rather chase the business a little bit rather than set us up for disappointment. We're coming out with a 2 to 3 year or 3 to 4 weeks. Don't think we need to do that with all of the new unit store growth we have available to us. We'll continue to run the business we have. And we think we've got the right mousetrap in the way it's working.

Great. And then we had another one come in about just asking about your remodeling efforts. Just give us some update there on the stores you've been remodeling. And the question is on the remodel, or on any remodels, are you seeing incremental costs? You expect this cost to be incrementally higher in the next few years?

Yes. As most folks who have followed us for a while, we don't spend a lot to open a store, and we definitely don't spend a lot to remodel stores. We're a no-frills concept. We don't have a lot of fancy fixtures in our stores. We don't have a lot -- we spend $250,000 to open up a store with capital expense. So there's not a lot of capital we put into the boxes. We really focus on the deals to drive the customers and the excitement of the box. So do we do remodel? Sure, we do. But it's not a major campaign. It doesn't change the operating model and the operating metrics of any significance. Remodels for us are lighting retrofits, bathroom remodels, sometimes changing the store around a little bit if it's real tired. But it's not a big process we work on today. There's not a real big bang for your buck other than making the store look nicer or giving a little bit better shopping experience, because the deal in one store is the same deals in other stores. So that's really what drives the overall results in our stores.

Got it. And we've had some -- a couple of investors just want to get a little more color on the Army member themselves in terms of what do the demographics look like for that Army member -- Army members. And then another question wants to understand, do you ever survey Army members to get a sense of what products they would like more of in the store?

Randy, with regard to surveys, we historically have never been a survey-type company. Mark was not a big believer in doing surveys. But that is changing a little bit now with the new regime. Tom is interested in starting to survey our customers. We've not done anything of any significance yet, so I don't have any information with regards to asking our questions -- or asking questions to customers on what they want to see more of. That's something in the future, we'll definitely be looking at. With regards to the overall demographic profile of our customer is it's a very, very, very wide demographic profile. But our average income is right around $55,000 a year. Average age is right around 55 to 58. But there's -- the dispersion, it goes from -- we used to have a saying, anywhere -- anyone between the age of 20 and 70 with a wallet or a purse. But it is that wide, the way we see our customers. Some people really need us and some people just like to save money. So you get a wide dispersion of our demographic profile for the Army.

Got it. And speaking of money, you guys print a lot of money, high free cash flow generating business. We always get the question, what do you kind of think about with excess cash? So Jay, maybe give us some thoughts on how you're thinking there.

Sure, Randy. It's a good question, and it's a high-class problem, so we're excited about that. And kind of back to the capital question, I mean, this business has never been -- the remodel question has never been capital-constrained. We consistently invested in the business in the system side, on the remodel program, on the store side, as well as the human capital side. So we've never been cash constrained. That's a beautiful thing about this model is that even though we are continuing to grow at high clip, we generate plenty of cash. So going forward and what we've talked about is it's time to start really investing that cash in a stock buyback program and returning value to the shareholders that way. We think that makes sense versus a special dividend or a dividend or -- we're really not going to change our basics, right? We're not looking at acquisitions. We're not looking to accelerate our store growth rate. So the stock buyback makes sense. I think going forward, to your point, given the cash balance that we have on the balance sheet, we're going to be doing that more consistently and in higher volumes than we have in the past.

Understood. One thing that we're getting -- or a couple of things we're getting coming out of this conference this year is a remarkably strong consumer, one that's not really price-sensitive, but always looking for value, obviously, which is great for your business. And the other thing is obviously the pressure on, let's say, wages or supply chain. Give us some perspective on what you're seeing around the supply chain right now. And what kind of things you're doing to adjust or react to deal with those issues or however great or minimal they may be.

Yes, Randy, I'll break it up into a couple of pieces. One would be transportation and then one would be the supply chain distribution side of the business. I would tell you that the transportation side, in -- most pressure is coming out of the imports from Asia and other countries. Thank God, only about 16% to 18% of our business is import. But that's the #1 struggle, I think, most of us have right now is: one is the cost of importing; number 2 is the timing of getting your imports on vessels to get into the overall position you want to be and to get them sold in the season that you're supposed to receive them in. So that one right now, I tell you, all of us are working very, very diligently on. Some have more challenges than others. I do think that this will eventually benefit us in the long run, because anytime there's a disruption that takes place, we'll benefit from that because there's going to be canceled orders and goods that then get shipped out of the country for other retailers. But that's one area definitely we're all focused on to work and try to offset. And a lot of the offset doesn't come on the freight side. It comes on buying better, buying and getting the margins you need, increasing your pricing potentially to the consumer. We see the same thing happening domestically, the transportation costs are much higher than they were last year on the inbound freight side. Outbound, not so much. We have dedicated carrier contracts on the outbound side. So that's insulated a little bit better than the inbound transportation. And wage pressures are real. And we mentioned those in the last several calls we've had, and we're continuing to make adjustments and invest into the wages that we think with higher wages, we'll get a little bit less turnover. Hopefully, get a better employee and get more stability in the workforce. And that will yield more efficiencies and offset some of those costs. So at the end of the day, all the transportation cost headwinds, we'll have to either buy better or increase pricing to maintain our margin. Because that's how we operate and how we buy. Most of the margin -- merch margin impact that we'll have will be on the closeout side, to be able to buy potentially better and price sharper on that with regards to offsetting the transportation cost.

Got it. And then on the 16% to 18% of your product that is import, what is the bigger headache? Is it cost or the timing?

Probably cost right now, for us. We've been ahead of it and pushing real hard to get our stuff moving earlier. But right now, all of retail is trying to do that for the fourth quarter. We're all trying to make sure we get our goods in earlier. But that's causing the pricing increase as well because the demand is surging on the movement of the goods on the vessels. But I'd say the cost is probably a little bit -- they're both headaches. But the costs are a little bit higher than right now than on the -- than the timing.

Got it. It seems an issue for me, just this one thing is -- it [ sounds to me ] is interesting. Do you foresee any issue from the slower industry around severe ambulatory shortages as we get to holiday 2021?

Randy, I don't -- and this is -- for us, I don't -- I really probably can speak to us only. I don't see any shortage of product availability for Ollie's.

Yes, I don't mean for you. I'm just talking about, if you think about your 16% of your business, the import, where there seems to be some timing issues. Not that this -- again, it's not a big deal for you guys. But I'm just curious on -- and just based on what you're seeing, would you extrapolate that to be a potential issue or not for the broader retail kind of area going into the fourth quarter?

If things were to continue the way they are today, I'd probably say there could be. And I'm talking as of today only in -- 2 months from now could be different. But they're -- right now, with the third stimulus that came out, people are chasing our tails right now a little bit. So I think in 2 to 3 months, it could ease up a little bit. So people might do some last minute getting their goods for the holiday.

And then Randy, I think some of that, if that disruption does come to roost, that presents not for the fourth quarter, but longer term, that presents opportunity for us.

Oh, yes. Sure, for sure. So my last question, again, very helpful and we're about out of time. Just I guess, from your both of your perspective, what worries you the most about anything you're looking at in our economy? Is it truly inflation or potential inflation? And what excites you the most about things you're seeing around the economy in your business?

Yes. I would tell you, Randy, probably wage pressures and inflation are the 2 areas of concern for us. But both of those bode well for us in our model that we have. Because as inflation increase, we just have to keep the value proposition between us and the other retailers. With regards to opportunities, I think a lot of these canceled orders, any disruption in the marketplace is going to bode well for us in the long term. So I think there's going to be a lot more opportunity for us in 2022 as well.

That's awesome. That's a lot of great visibility, growth, a lot of opportunity for Ollie's. So gentlemen, I appreciate your time. John, Jay, thank you. Everyone on the line, thank you for attending this session, and thank you for attending our virtual conference this year. Let's go over to our next session now. And I hope everybody can join us next year in person. So thanks again, everybody.

Thanks, everybody.

And thanks, everyone. We appreciate it.