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

Good afternoon, everyone. This is Kate McShane, again, Goldman's retail hardlines and broadlines and grocery analyst. I'm happy to be hosting the management team for Ollie's Bargain Outlet, and we'll be moderating our fireside chat today. For those of you that are new to Ollie's, Ollie's has a powerful value proposition with prices at deep discounts versus department store and mass retailers. The company presents a treasure hunt experience to its customers, offering a broad selection of brand name and closeout merchandise at prices that are deeply discounted. Today, we have with us John Swygert, President and Chief Executive Officer of the company. Prior to his appointment in the role, he served as COO and CFO and has worked in discount retail for over 27 years. And we also have with us Jay Stasz, Senior Vice President, Chief Financial Officer of the company. He joined as Chief Accounting Officer in 2015 and has been in the current role since 2018. John and Jay, thank you so much for joining us today.

Thanks, Kate.

Yes, thanks for having us.

So I thought, I could just launch in with just a question about the state of the discount customer throughout 2020 and 2021, given the massive amount of cash that's been in the consumers' pockets due in a large part to government stimulus and less vacations and leisure activities. We saw an extremely strong spending pattern for customers across retail. I wondered if you could maybe take a step back for us and help us understand what you are seeing when it comes to the health of the customer and the customer balance sheet today?

Sure, Kate. Obviously, from our perspective, I would tell you that since the onset of COVID, it's been a rollercoaster ride for anyone in retail, 3 stimuluses, shutdown of the economy with the impact of COVID, the subsidies for federal and employment benefits has really made it very noisy for us to figure out exactly what has gone on with the consumer since the onset of COVID. But what we have seen from an Ollie's perspective is when stimulus hits certain demographic profiles, profits, they spend, and they spend it quickly in our stores and every other store out there in the marketplace until it's gone. We saw that pretty heavily in the first, second and third stimulus. From my perspective and also other folks who were able to get the stimulus dollars as well, I think they might have gone up a little bit in terms of their spending habits to other retailers and not been so sensitive to price and bought things that they wanted versus needed. I think that now that the stimulus and the unemployment benefits are -- have ceased, I think we're going to see a little bit return -- more return back to normal for the consumer. I think that's going to play into the discount retailers hands a little bit more than we might have seen in the prior periods. While we did well, very well, in fact, I think we'll continue to see some momentum in our businesses as others in the discounts sector should as well.

Okay. And you had mentioned stimulus. We've heard kind of conflicting thoughts around just how big of a push or cushion the child tax care credits are in terms of supporting spending. Have you seen still the similar level of demand with this level of stimulus in the environment versus when basically the other stimuluses were put into place?

From the child just -- when the child stimulus started in July of this year, there was a first payment that occurred. We did not see a big change in the consumers' habits. I think who might have seen a bigger change in consumer habits in the child credits were more of the folks who play in the back-to-school environment. I think that the parents went and spent that money on back-to-school more so than Ollie's Bargain Outlet type of business. So we didn't really see any impact from that. Does it have legs after schools and in full force, potentially? And I think there's also another -- the SNAP benefits are going to go up on a permanent basis starting in October, which I think will benefit the discounter as well.

Okay. Great. And then if I could just switch gears a little bit to who Ollie's is today, one question that we get a lot from investors is, is this company different post-pandemic than it was pre-pandemic? Whether it'd be from a balance sheet point of view or a number of customers they acquired or just any kind of different role that maybe you have in consumers' lives? And so, I wondered what your view was of all these pre-pandemic and now post-pandemic, do you see any kind of major shift or change in the fundamental offering of -- or how could customers view Ollie's?

Yes. I really believe that our model does not change at all pre- and post-pandemic. We're a closeout retailer. Our #1 job is to provide value to the consumer and we're going to continue to do that. We haven't really learned anything that would make us change our model. Our new store growth algorithm is still intact. I think our overall long-term algorithm from a comp store perspective is still intact, and we don't plan on changing what we've set out to do on our mission 39 years ago. We are who we are, and we're going to continue to do what we do, and I think that it resonates with the consumer.

Yes. And Kate, just to add on to that, I mean, I think the good thing from the pandemic is we did see a lot of new people come into Ollie's, and we worked hard to convert them into the Ollie's Army and continued to give them deals and things that will excite them going forward. And I think we've had a lot of talk about the comp, and this is not a comp story, it's a growth story. But with all the noise that we just talked about on your previous question, with the stimulus and changing consumer behavior, maybe spending on travel and other things in the near term, we maybe haven't seen the lift that we expected. But when we look at the cohorts of the people that joined the Army during the pandemic, they're sticky and they're as good, if not a little bit better than the people they joined prior to that.

That's helpful. What would you say is Ollie's competitive advantage? Obviously, the differentiation on the -- within the discount retailers is your closeout piece. But what would you say is one of the bigger competitive advantages? Or what makes a deeper competitive moat for Ollie's?

Yes, Kate, I believe the -- what makes us have a competitive advantage over most other retailers is our ability to secure brand-name closeouts at a great value to the consumer. The value in the deal drives this model. So giving the consumer savings on a brand-name product resonates with the consumer. And I believe that, that is something that the treasure hunt experience we're able to give to consumers not duplicatable online and something that there's a built-in protection and the standpoint that you can't go online with brand-name closeouts as most of the major manufacturers will not let that happen. So it's great for us to have the relationships we have. Relationships are key to our business, and we work very, very hard to maintain and strength of those relationships each and every day with our vendor community.

Okay. A lot of news lately in the last few weeks has been around the supply chain. But quite frankly, I think the supply chain has been fairly disruptive now for the last 18 months. I think we're just seeing much more of a fever pitch right now throughout the supply chain. I wondered if you could maybe talk through how the supply chain disruption specifically impacts Ollie's? And I think you've had a recent change to your head of supply chain. And maybe if you could talk a little bit about what he's going to bring to the table in this new environment?

Yes, Kate, I think you're spot on with regards to the supply chain has been challenging for the last 18 months in one way, shape or form that I think every retailer has had that same challenge ever since the slowdown in the economy or the shutdown in the economy, plus the stimulus that started in Q1 of 2020. It's definitely -- I think it's gotten a little more legs because everyone's gotten exhausted with the supply chain challenges that are out there. But most recently, the cost of moving import freight is just put the nail in the coffin, if you want to call it that way, or it's just been very difficult to not only get the containers moved, but also the cost of the containers has put a lot of stress on retail. And that's just -- that's been the last piece that we've all been struggling with. And we've worked very, very, very hard to get ourselves in a good position for the holiday season that's upcoming with our toy business, our seasonal telemetry business and also our heater business. So I think we're well positioned to do that. Turning to the change that we most recently had from our supply chain perspective. Obviously, we've had a change and change is sometimes scary for folks. In this case, this change was mutually agreeable between the company and the prior [indiscernible] supply chain, and we think it was the right thing to do for both of us. And we really felt that the leadership qualities that we needed to take it to the next level were something we didn't have and need to make a change there. And obviously, Eric, who joined us in May, had a -- has a great vast knowledge of the supply chain. And he's currently handling the day-to-day operations as we search for a new Head of Supply Chain, which we are currently right in the middle of it. We're having some good candidate flow. So we're looking to have someone here on Board in the near future. And I think that will just help us take it to the next level.

That's great. So with regards to the supply chain, and I think you mentioned this a little bit in the previous question, there are 2 issues. One is just getting the product to the stores in a timely matter and then there's the cost of it. So I wondered if we could maybe talk just about getting the product first. You mentioned on the Q2 call that you expect to see timely delivery of product for the back half of 2021 and that you should be back on track with inventory by Q3. So I just was curious how you've been able to manage this and avoid the disruption and what some of the more mitigating factors are in the near term that you're able to take? And how does that look longer term?

Sure. Kate, there's definitely been a lot of heavy lifting. It's not been easy. There's been a heck of a lot of focus put on it. First and foremost, getting the product move from Asia to the ports has been our number one focus because without the goods getting here, can't sell from an empty cart. So we've been pushing that. We've made a heck of a lot of headway. We believe we're well positioned to get all of the product we need for the back half of the year and into the supply chain. We've invested in people and the buildings. Now we've had to get more people into the buildings in order to get the throughput increase from what we -- where we were at before, that's been a hard lift as well. A lot of people are getting unemployment benefits and didn't want to work, having to pay a lot more money to get people to come to work. And now we've had a -- now we have to get them all trained up to get them more efficient. And that's what we've been working on since part of Q2, and we believe we're in good shape at this point in time to be able to meet our goals for the -- by the end of the third quarter and having our stores in good stock position for the holiday season. And I think we're well on our way, and we're feeling good where we're sitting today.

Great. And then when it comes to that cost piece, I wondered if you could talk to us about where you are seeing more of the inflationary trends? Is it on the product cost side? Is it on the container cost or contracts, domestic transportation? And how much pricing is Ollie's being able to take as a discounter in order to offset some of this pressure?

Yes. I would just very simply put, we're seeing cost pressures everywhere. It's not -- one category is worse than the other. I would tell you the worst category in terms of inflationary pressures is definitely on the import freight side. The good thing about that, I do think that's transitory in nature. I don't think that's a permanent cost increase. So I think we see that come back, hopefully, after Chinese New Year or shortly thereafter, we see that come back to us and get a little bit more stable. I think the domestic freight has definitely increased as well. I view that more of a permanent increase. They were paying more for drivers. That's not going to go down. So I think that's going to continue to be a pressure. It's not nearly as bad as the import cost pressure, so I think that we can maneuver through that. And there's just pure -- anything that's a commodity-driven item, there's inflationary pressures all around the board from all the major manufacturers. So one thing that we do and what the neat thing about our model is, we're able to follow the market. And I think with the value proposition that we offer is the market goes up in price, which most everyone is doing. We follow the market with the same value proposition, which gets us to take our prices up to help offset some of these pressures that we are seeing. So there's one retailer not moving much on price today, which is the largest retailer in the world. So it's making it a little bit more challenging, but we're maneuvering through it. And we're still giving the consumer a value where we're still -- we're getting still pretty close to maintain our margins.

So the point of that is just that if everybody is going up in price, you are maintaining, for the most part, that price gap?

Yes. We're definitely working very hard to do that.

Okay. That's helpful. I wondered if I could switch gears a little bit now to Ollie's Army. I'm a little bit newer to the Ollie's story, but this always strikes me as a big differentiator and something that is a very strong proposition for your company. So you mentioned on the Q2 call that the Ollie's Army members accounted for 80% of total sales as new members continue to join. I just wondered with regards to the Ollie's Army, how has it -- could we take a step back and could you talk to us about how it's evolved over time? And how you're using it to help keep some of these newer customers?

Sure. Ollie's Army has been around for a long, long time. It's been around before I got here 18 years ago. So we've definitely made significant strides in how the Army operates and how we track the Army and how we onboard the Army from when it started initially. It used to be 100% manual and people would fill out post cards and send the post cards into the support center and then we manually enter in about 6 or 8 weeks that would be into the Army, we'll be able to track them. So the process we've gone to and we jumped into the 21st century right away to where we can onboard the customer on a real-time basis, we can scan the driver's license, we can get their e-mail address, like onboard themselves. So there's a lot of ways for them to just getting the Army very easily. And we focus on conversion very, very heavily. So we know that an Ollie's Army shopper is much, much more valuable than a non-Ollie's Army shopper, and we focused heavily on converting folks to the Army. And I think we're very, very successful at that. The Army is very, very loyal. They become very -- I'll call them very, very sticky to the model, and we view that as a very integral part of the business. But I would tell you an 80% of sales, that's a huge number. I don't know how much higher that goes if that goes higher over time. But we're continuing to work on converting folks to the Army and maintaining them in the Army and the folks that we call the One and Doners. We're working hard to get them to shop more in our stores as we know if we get you in the store 3 times, we got you probably forever. So we work on that very, very hard.

And then I guess if we could ask a question with regards to just merchandising and product categories, we have seen a little bit of a shift over time. So maybe could you talk to us a little bit about how you're viewing the opportunity within certain product categories? If we can expect any kind of shift in mix over time to other categories, maybe ones in which you're seeing more closeout opportunities? Just how do you think about the mix of business over time would be helpful.

Yes. Kate, we've been doing this for a long, long time. And I would tell you that our categories, whether it'd be the inventory levels of the sales level are very consistent year after year after year. We do not have -- we have what I call a fluid open to buy the merchants go where the deals at. So if there's a big deal in the housewares department that wasn't there last year and now this year, there's not a big deal in the clothing department, we move dollars out of one department to the next department. So we continue to look at what the deal flow is. So we don't have a hard fast rule that you have to buy so much for this category if the deal flows stronger than another category. So it's been very, very consistent. When you've been doing this as long as we have, you do get a lot of consistency in your model. I will tell you 1 category that we are working to try to expand, and we think there's opportunity there is in the pet's category. Pets, we view that we have some room to expand and capitalize on in a good way. So we're not trying to expand -- there's been rumors out there we're trying to expand the clothing department. We have no desire to expand the clothing department. We're really on a -- we're on the basics of clothing. We don't like to get in the fast fashion or any markdown risk. We buy deals in clothing when bankruptcies are probably on a rise. We bought a huge wedding dress deal 3 or 4 years ago and recently bought a work clothing deal. So it just happens to deal with deal flow, but that's not a strategic area we're trying to expand or capitalize on at this point.

Okay. We are asking all the companies that are presenting at our conference today and tomorrow for questions. We've touched on a lot of it already, but this is just -- to just kind of even the playing field a little bit between everybody who's talking to us. Just as a reminder to anybody who has questions for the Ollie's team, please send them in now so I can ask them after these couple of questions. It's kind of lightning roundish, it's multiple choice. So the first question that we've been asking is just about consumer demand going forward as we get further away from stimulus payments, do you expect to see momentum -- I'm sorry, sales accelerate, decelerate or stay the same through the end of 2021?

I think that's a good question with so much turmoil we've had in the last 18 months. It's a challenging one because we still have to deal with stimulus that's coming up in January of 2021 that we have to go up against. But I would think from a discount shoppers' perspective, I think we might see just a slight acceleration in the overall spend compared to last year and these next 5 months of business. But nothing real, real big, but I think we'll see a little bit of improvement.

Okay. Great. The second question, and we actually haven't talked too much about this. So we can maybe take some time to talk about it now if you'd like is just digital penetration in 2022 versus what we saw in 2021 and just how you're thinking about the digital opportunity for Ollie's?

Yes, Kate, I would tell you that we -- 2021 has been a test and learn year for us on the digital front. I think 2022 will be our first year of focusing on spending on digital precisely to some of the markets we've been testing with. So I think that's our first real year as a digital marketer. It's still not going to be our -- the bulk of our spend. Our bulk of our spend is still going to be in print, but digital has been a much, much larger part of the overall spend than it has been ever.

Okay. Great. The third question we're asking about, and this isn't totally, again, fully applicable to Ollie's. But across the retail space, we just haven't seen much in the way of promotions. So maybe your general view on the promotional environment, what it will look like in 2022 versus 2021?

Obviously, we're not a big promotional company. We're value-driven, so we price it to sell it right away. So we're not really -- our promotions are very, very, very few relatively speaking, other than for the Army. I would imagine with all the stimulus that was in the market during 2020 and 2021, I would expect that 2022 will be more promotional than it has been in 2021 for the in-line retailers.

Okay. Great. And then our last question has to do with the supply chain. Again, we've kind of walked through this, but we're asking every company what their specific biggest lever is to mitigate some of the supply chain pressures. And do you expect inventories to grow faster or slower than sales in the back half of the year?

The levers in the supply chain that I believe the companies have to pull from my perspective in this year are pretty few and far between. I think the lever for us is the retailers to push on the price and have some price increases that will pass on to the customer, but always maintaining the value from our perspective. So I forgot your last question, Kate.

Just inventory is growing faster or slower than sales in the back half?

I would hope that with us coming up to holiday, the sales should outpace the growth of inventory.

Yes. For us, we tend to look at inventory growing in line with our unit growth.

Okay. We did get one question in from the audience. You talked about challenges on the import side of the business, but you are much less exposed to this pressure than many of your peers. What kind of advantage might that give you in the market?

I think at certain times of the year, it gives us much more advantage than others. But at this point in time, we're -- we normally -- our average annual import business is about 16% of our sales. Right now, at this time, it's closer to 22%. And it's very important categories, be in toys, heaters and telemetry and seasonal. So it's very important for us to get the goods. And at this point in time, -- to that end, it is -- we do have a little bit of upside relative to other retailers as our import penetration is lower. So our pressures are a little bit less than others that might be experiencing some cost pressures. But some of the larger retailers have a little bit more buying power than we do as well on the import side. So we're -- we do believe that we're going to be successful with our pricing proposition and still being able to maintain the 39.4%, 39.5% overall gross margin on a full year basis is still pretty compelling with all the pressures everyone else is still getting out there in the marketplace. So we feel really well positioned for the back half of the year.

Okay. And as we wait to see if there are any other questions in these last few minutes, one thing you touched upon was labor and, obviously, everyone has been facing pressures and shortages when it comes to labor. I know it was a bigger issue on the DC side for Ollie's than anything you really saw on the store. I just wondered with some of the unemployment benefits rolling off here. If you've seen any kind of alleviation? And what is your outlook for wages now going forward? Is it maybe a little bit higher than it was when you began the year?

Simply put on that one, I would say, yes. I think the wage pressure is real, and I believe that we're going to see them continue to increase on a relative basis. So I would -- that I think is here to stay.

Yes. And I think as we've seen the unemployment benefit roll off, certainly in the states that it took it back sooner, we did see an uptick in the ability to hire and staff our DCs there. We actually just ran the job fair yesterday across the chain for DCs and the stores, and we had a great event in New York, Pennsylvania, which had not previously rolled back the unemployment benefit. So I think with those lapsing over the Labor Day weekend, it's obviously still very early, but that was a good initial read on that.

Okay. It doesn't seem like we have many more questions in the queue. So I'll be able to give you a few minutes back of your time. So I want to thank you so much for being with us today. Thanks for taking the time to walk us through. Everything I know it answers a lot of questions post Q2, and thank you to the audience for dialing in.

Thank you, Kate, and it was nice speaking to you today. Thanks anyone who participated for your support.

Yes. Thank you, all. Thanks, Kate.

Thank you.