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

Okay. Thanks, everyone. We'll get started. My name is Peter Keith, senior research analyst at Piper Sandler covering hardlines and leisure companies. Very happy today to have the Ollie's team with me. Just to go through with quick introductions, we have John Swygert, CEO; Eric van der Valk, COO; and Rob Helm, CFO. It probably doesn't need much introduction but as you may or may not know, Ollie's is by far the leading closeout retailer, particularly in home goods in the United States. So Ollie's team, thanks for coming, and welcome to Nashville.

Thank you, Peter. Thanks for having us.

So I want to jump in right away with the obligatory closeout question to John. But let's just talk about closeout availability. How do you feel about the closeout availability environment. And I guess maybe my view is that it's good, it's always good. But I'm worried is abnormally good, which is a good near term and then maybe more challenging a year from now. So how should we just think about where we are today with closeouts and where we might be in 12 months?

Peter, I know you'll be surprised about this but this is not the first time we've had this question. So with regards to closeouts, we've been doing this for about 41 years -- over 41 years. And throughout this period of time, the main focus is relationships [indiscernible]. There are more closeouts in the marketplace than Ollie's will ever, ever have initially resource. I say that the overall addressable market is probably north of $90 billion. We say about 2/3 of that is softlines. So we're really not in the softline. So let's say 1/3 of that is hardline. At full maturity for our company, we believe that will probably equate to about $3 billion to $4 billion of closeouts. So we're very touching even the beginning of that [indiscernible] So the big thing we focus on each and every day is having a strong relationship with that vendor or that partner that has available product that's paramount to the success of the business. With our scale, our size, our notoriety since going public, has really differentiated us from anyone out there in the marketplace today. And we are, by far, number 1 goes [indiscernible] and as we talked about many, many times it's hard to explain where this all [ product ] come from? You don't buy it, where [indiscernible] . So it's a great question. Don't really know where it goes, we know how many [indiscernible]. Our [indiscernible] for primarily first one, sometimes a vendor [indiscernible] in the right time. So that will be one thing that we always push hard on [indiscernible] fear, we wanted it. The answer is no, they make a lot of [indiscernible] . So that's really what [indiscernible] positioners. Innovation creates obsolescence. You have to think about that, these major manufacturers create products each and every day and they're changing their packaging every day, they're [indiscernible] promotions, whatever they're doing, they have a lot of larger companies have [indiscernible] policy. That's great across the world. [indiscernible] get those good assumptions consumer. We never, never ever sell any vendor's product in the market those [indiscernible] and use that means a lot major manufacturers. We never have channel conflicts. We respect what they ask not to do, and we'll ever do it. So there's a lot to be in this, we operate in, I think we're trying and I think we're the best at in terms of what [indiscernible].

What -- when you think about the relationship with suppliers, what are things that they want you to do and what are things that they don't want you to do that helps you build that relationship up.

Well, first and foremost, they want us to do take the business [indiscernible] then these other retailers charge the people back. We don't do any of that. There's no games, no [ handling ], no nonsense. And when they say what they -- something that they says not to do, don't advertise the product, I don't want it out in the marketplace, I don't want to print anywhere, I don't want to online. We'll do that as well. We respect what they asks us and we'll not do it.

Okay. Maybe move on to just unit growth and you still have this tremendous store opportunity. Maybe just help everyone remember or remind us where your total store target is, where you are today, and then how we should think about unit growth on a multiyear basis over time?

Sure. [indiscernible] Peter, it's [ Valk ]. We've 493 stores today, on way to opening our 500 store later this month in our 30th state. So we're in 29 states today. We'll open in Iowa, all going well at the end of the month. So our store target long term is over 1,050 stores and we have the confidence we can get there at a pace currently of about 50 to 55 stores per year. We're opening 45 this year. We would expect to open somewhere close to 50 stores next year.

Okay, all right. and how about just the real estate opportunities right now? That seems to be a hot topic. There's been a few bankruptcies. I know it takes a while but what are you seeing out there that intrigue you?

Sure. I would answer that question. We like our chances in this market. We had not seen disruption in retail real estate in a while through COVID, things were pretty stable. Occupancy rates were fairly high. What we're seeing now is that beyond Party City, Christmas Tree Shops and other retailers, Tuesday Morning is another example, have either become distressed or have closed as there is more real estate out there. We have participated. We did participate in the Bed Bath & Beyond Auction. We're able to pick up a store that we're currently navigating to open. Peter, to your point, it's more of a long-term opportunity as sites become available, landlords sit on the vacancies for a period of time, hoping potentially for financial deal that's a little bit better than Ollie's deal. Eventually, they come back to us. We have a strong balance sheet. We attract traffic to centers. We're definitely an appealing retailer. It may take 6, 12, 18 months, sometimes for us to get the right deal for us. But we like our chances. We like where we are today.

Okay. Great. I guess trade down is kind of a big theme and topic today, a little bit more challenged consumer depend on who you're talking to. Ollie seems like a perfect kind of trade down destination. What are you guys seeing with new customers coming to stores? And then if you are seeing new customers, are there retention techniques that you're using today that maybe you haven't utilized in the past?

Sure. Yes, good question. John called this out about a year ago. We got a lot of questions about trade down and when it would happen and he answered the question pretty consistently that trade down will happen. We will see a higher income consumer discovering Ollie's and shopping us with frequency, and it has happened now for the last several quarters, we're seeing that trade down of the higher income consumer, for us, that's over $75,000 in household income. We definitely saw an acceleration in that $75,000 to $150,000 range or $100,000 to $150,000 income range, which is relatively high for us as we sit a little below $75,000 on average. So we definitely like what we're seeing there. We also are seeing a younger customer shopping our stores in the 45 to 55 range. We're seeing more frequency from the 65 and older customer as well, which is great to see. In terms of techniques, to retain and attract, we're much more sophisticated in digital marketing now than we were maybe 2 or 3 years ago. We've deployed quite a few tactics in the digital marketing space, most are social media related like Facebook and Instagram. And Cardlytics is another example. More sophisticated in targeting, acquiring new customers using local like in algorithms to find customers and target specific income groups and age groups, much different than we could in print media in the past.

Okay. I'm going to get a financial question to Rob. So let's just talk about gross margin. The company has always targeted this 40% gross margin run rate and COVID aside, you've done a good job of maintaining that. But what is still -- I guess, the right level for gross margin longer term. And I'm thinking about it in the context that wages have gone up, expenses have gone up. Is 40% still the right level? Or is there some flex in that?

This is a good question. This is one that we've been talking about quite a bit internally. Our gross margin, we're a fast follower to Walmart in terms of pricing. So our pricing is 20% on stable items up to 70% off on discretionary items off of Walmart's price. As Walmart and some of the bigger blocks retailers have increased prices over the last couple of years, which at the beginning was to cover supply -- elevated supply chain costs into elevated wage investments into now the impact to shrink over the last year. We've seen that we've been able to Increase price with them and pace that price. We haven't had the same kind of cost increases. We've had a marginal impact relative to shrink and smaller than some of the others. So there is a possibility of going over the 40% long-term algo. However, what we've always done and what's been really successful for us for the last 41 years, is to reinvest in price to our loyal customers and to drive share above the 40% gross margin. So we're going to continue to weigh as we're going to look at our cost structure for next year, and we'll give an update on our year-end call.

Okay. And how about just putting it all together with like a longer-term EBIT margin. Is there a general range that you think about as a good run rate for the business?

Near term, we're looking to get back to the 11% to 11.5%. That would be first half margin recovery based on the elevated supply chain cost we saw this year and a bit of leverage off the outsized cost we're experiencing this year and are 1.5% on algo comp expectation for next year.

Okay. Okay. Let's take next question, we'll go to Eric. There's some interesting operating changes you guys are making, and I want to just unpack this trend of moving from an 8-page to a 4-page circular, I think there's a sort of a maybe a sales benefit because you're now putting more real estate in a circular to key items but it does also seem like there's some operating benefits. And I hope you could maybe explain that because my sense is the operating benefits are actually greater than the sales benefits.

Sure. Yes. We like what we're seeing in the new format ad. We've also enhanced the creative to make our deals really shine and to really emphasize the value proposition to the customer. It is less content, the equivalent of a 4-page ad now versus the 8-page prior but it's actually primarily a single sheet what we call broadsheet ad. So what we found is, customers are mostly interested in the front- and back-page items in what was previously their 8-page circular. They are attracted to the strongest items in the flyer, they tend to be the call to action. We can fit the strongest deals in a 1 page or the equivalent of 4 pages of content and really screen to the customer come in now and buy that deal before it's gone. When we did testing in the 2 different formats, we found that there was literally no difference between the traffic we could drive in each of the formats. So the question, Peter, about operating benefits, less content to show to move through the supply chain from purchase order all the way to show it to the customer on event break day. It's just much easier for us to manage to ensure in-stock. It's a better customer experience as well, it's more easily can find the product, it's easier for associates to direct customers to find that product. And then also, all that product that was in the ad that was in the center page of the ad is now in stores immediately upon its rival in the DC, we turn it around to store. So the product that may have been just a little bit less compelling that wasn't [indiscernible] the front or back pages. Those deals are now immediately in store for the customer to see and it creates more newness and a more compelling shopping experience on a day in, day out basis.

So if you think about that before with 8 page, where you hold -- you'd hold back items that would be in the circular until you're getting ready for the circular to launch.

That's correct. That's correct. We'll hold that.

[indiscernible] right before.

The majority of the product that was in an ad would be held back for the break date of the ad, in some cases 100% withheld in back rooms for that break day typically on Wednesday or Thursday, given the event's break week and some product was out in the stores a week or two in advance. So now it's live, it's very fluid and all that product is in front of the customer immediately.

Okay. Great. And that's something that started this year.

That's correct. We were testing in the later part of last year and most of the adds this year were converted.

Okay. All right. On the last earnings call, you also talked about customer reactivation and that you're finding some success just being more aggressive with some of these older customers. So maybe you could talk to what exactly you're doing to bring people back in?

Sure. Reactivation, we've been testing different offers to reactivate customers that have been dormant, progressive offers, coupon-related offers, seller of transaction type offers which is new to us, and we're seeing some positive results from all that. We're also investing in ensuring that the Ollie's Army customer understands the benefits of the Army more clearly, They understand the value of being a member of the program. We just introduced a military discount, the first Tuesday of every month exclusively available to military and family of military that are members of the Ollie's Army. So we're constantly looking at -- to the Army and ways in which to make that experience as compelling as possible.

Okay. John, so let's talk more about the Army. I guess how many members do you have? What percent of sales do they represent? And then what is the tier structure. I know you've implemented some motivational tiers to get people to spend more. Help us understand that.

We have a boatload of people in the Army.

Yes, it's a lot .

Right now, we have an active membership of about 13.5 million members. And we focus on keeping the members to act if we could. We purge every 24 months that you have been in the store. So we really try to keep it clean. With regards to the tiers and the membership, we try to keep it simple. We have a One Star general, Two Star General and Three Star General. One Star Generals are folks who come and shop once in a while are less frequent. But the big things are, you have to spend $250 to become a Two Star General and you have to spend $500 to become a Three Star General. There's some benefits to being a Two Star General, Three Star General relative to the overall Army. But the perks come along with the spending. Our program is pretty simple. Every $250 you spend you get a 10% off coupon for your next purchase. We have 2 events a year, one event in year that's elusive to Ollie's Army, which is always Army Knight. And then we have 3 different mailers each year that we send out for Valentine's mailer, a summer mailer and the holiday mailer where [ they're ] 15% of the entire store for being an always Army members. So a very big part of our business. North of 80% of our sales are made up by the Army. And that people have asked where you want that to go? I said, "I don't know." 80% seems like a pretty high number from what I've seen. We're pretty excited about it, and we do have a very, very loyal following.

Okay. How about on those tiers where you provide the motivation to spend more? Is that anything you talk internally about tweaking or I think you've used the phrase like increasing the [ carrot ], are those working for you? Or could they be adjusted a bit?

We talk about it all the time, everything we do. It's something that becomes difficult from an execution perspective. We don't like to talk in a discount sense more than we already are. Our prices are the lowest in the marketplace. So trying to give additional incremental discounts is something that's very difficult for us to do. And then anything special from a fulfillment perspective is even more challenging. So we think the program is sized right, right now but we'll continue to look at it and see where we go tweaking in the future.

Okay. We are seeing growth in our Two and Three Star Generals as well on years basis. So we are seeing our most valued customers spend more, which is a great trend.

Okay. I want to make sure we talk about remodels. Maybe that's a good question for Eric. So can you just give the group a description of what you're doing within a remodel, what it costs? And then maybe what the sales lift is once the remodel is complete?

Sure. Yes. We -- this program started early last year. So we've just anniversaried a handful of stores. We've remodeled about 35 stores to date over the last 18 months or so. The concepts around remodeling store, we call the semi lovely store remodel. So the store is not meant to look brand new but it is meant to be more organized, more compelling shopping experience. Some of our stores -- some of the older stores don't have a racetrack. So that's an easy update to install a racetrack to create a more compelling impulse shopping experience. We're also creating experiences inside each category room to open up the room and open up the sight line so the customer can orient around a whole category of merchandise and the values in that room in that space, really scream, loudly, you could see so much product at once. At the front end of the store, we've installed registered cues, which seems simple. A lot of retail has done it. For us this is a new concept now. We have over 100 stores that have registered cues in the front, which is both an improved impulse shopping experience as well as just a better way to manage customer service in the line. We've changed the spacing of category to be more relevant to today's business, for example. So both business has been in decline industry-wide for many years. We are reducing the space in our books business and allocating more space to businesses that have increased over the years. We're changing category adjacencies moving the most relevant categories to the front of the store, if they're not there already. We spend between $125,000 and $200,000, depending on the condition of the store and how significant the fixture investment is, and we expect about a 2-year return on that investment, which is about a mid-single-digit comp lift versus prior trend.

Okay. Great. One popular topic here is shrink. So you're one of the retailers you haven't called out shrink this year as a headwind. Maybe just explain to the group, why your model may not be as exposed to shrink as other retail models?

So from a shrink perspective, we're very unfortunate. We count throughout the course of the year. We were able to identify a worsening trend at the end of last year. And so we were able to mobile up as resources to [indiscernible] get very swiftly. It hasn't gotten a lot better at this time but it hasn't also gone a lot worse. We feel like we're all over it. From a quantum of the shrink in the P&L, our shrink is a very low single-digit shrink percentage. Even over the course of the last year, [indiscernible] the situation is working [indiscernible] from pre-pandemic levels, we still remain firmly in that single-digit [indiscernible] our it's [indiscernible] relatively low ticket, clearly in the single digits. So from a shrink perspective, you're talking about things like health and beauty, cleaning supplies. It takes a lot of stuff to kind of accumulate a higher number. The other piece that we've seen, is shrink is a locally -- local and regional issue for us. About 10% of our fleet is causing, call it, 60% of the degradation of shrink. So we're putting local resources in those markets in terms of loss prevention, regional management getting into the stores, partnering with law enforcement, even using things like social media to help deter the additional shrink.

Okay. Great. So we got time for one more question. And so John we'll save the best for last for you. And this is kind of targeting your long-term algo in 2024. And so for the audience, you guys target annual same-store sales growth of 1% to 2%. And sometimes you'll be above that, sometimes it'll be below it. So this is a year now you're guiding same-store sales at 4% to 4.5%. So the investment community concern is that while it's clearly then they'll be below algo next year, it seems like you're pretty adamant that you guys should be on target with algo. Rob, you've mentioned it before. Help us get comfortable with that? How can you make sure we're procuring enough closeouts and providing offering to drive that continued same-store sales growth.

Sure, Peter. I think the big takeaway is, we're definitely a growth story. We're not a comp story even though we're going to have a pretty good comp this year. What drives our confidence in the long-term 1% to 2% comp algo is, one, history. We've done it for many, many, many years. Two, we know the deal flow will be there on an annualized basis. We don't necessarily know when it's going to be quarter by quarter by quarter. So we can never guarantee you that 1 quarter or every quarter is going to be a positive 1% to 2% and that's part of the choppiness of the business we're in. We've told everyone that since we went public, and we continue to tell everybody that as well. But we do believe the deal flow year in, year out does annualize itself, and we're very confident that with our merchant team and our relationships, we can deliver the 1% to 2%. And the big driver on that in the [ conference ] level for 2024 would be we're executing, we're executing well. We had a rough 18 months but we're back on track, and we're delivering the old way Ollie's has done and we'll be in good shape.

Okay. I think it's a great note to end on. So thank you very much, Ollie's team. Really appreciate you coming today and sharing some thoughts.

Thanks very much.

Thank very much. Appreciate it.