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Ollie's Bargain Outlet Details Its Plan to Weather the Coronavirus Outbreak

By Asit Sharma - Mar 21, 2020 at 2:05PM

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The off-price retailer adjusts to new marketplace realities.

Ollie's Bargain Outlet's (OLLI 8.04%) fiscal fourth-quarter 2019 earnings, released Thursday evening, enabled the extreme value retailer to find a reprieve on another difficult day in the markets on Friday: Shares gained nearly 2%, though they remain down roughly 40% on the year. Here, we'll review highlights from the last three months, as well as information from management on the company's response to the COVID-19 pandemic. Note that all comparative numbers that follow refer to the prior-year quarter.

Ollie's Bargain Outlet: The summary numbers

Metric Q4 2020 Q4 2019 Change (Decline)
Revenue $422.4 million $393.9 million 7.5%
Net income $50.3 million $49.9 million (3.8%)
Diluted earnings per share $0.77 $0.76 (3%)

Data source: Ollie's Bargain Outlet. 

Essential details from the quarter

  • Comparable sales dipped 4.9% after facing a tough comparison against a 5.4% increase in the prior-year quarter. Comps were also pressured by what management described as an over-investment in toy merchandise during the 2019 holiday season, which impacted sales in other categories.
  • The quarter's sales improvement was mostly supplied by a year-over-year increase of 42 new stores during the period, including 14 former Toys R Us locations that Ollie's took over in 2019 and rebannered following the toy giant's bankruptcy.
  • Gross margin decreased by 60 basis points to 39.2%, because of higher supply chain costs, which were partially offset by a higher margin on merchandise.
  • Adjusted operating income rose 3.6% to $64.1 million, while adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) inched up 2.4% to $69.3 million.

Management's plans regarding the COVID-19 pandemic

Close-up of a red "sale" tag in a bargain outlet store.

Image source: Getty Images.

To date, Ollie's hasn't closed its stores, unlike many larger retailers that have announced complete store closures for periods of two to three weeks as the coronavirus pandemic reaches a critical stage in the United States. For now, management plans to keep the doors open, but the merchandising mix will shift to household products. CEO John Swygert explained this strategy in the company's earnings conference call:  

Over 20% of our business falls into the essentials category, and our entire organization is focused on ensuring that we get these products and continue to offer great deals. We have seen consumers' buying behavior shift toward essential products, and we will continue to leverage our business model to ensure our shelves are properly stocked.

This emphasis on consumables, which more narrowly can be defined as food, household cleaning, and personal care items, should serve the company well in the coming weeks and months, although it will need to fine-tune its weekly marketing to alert customers to the product shift.

Ollie's also plans to broaden its "open-to-buy" capacity, to make quick, opportunistic purchases of close-out merchandise in trending categories. Swygert has been pushing to strengthen the company's open-to-buy capabilities for the long term, but the exercise should yield fruit in the very near future as a raft of attractive inventory becomes available from the sudden domestic economic upheaval.

Like peer retailers, Ollie's has seen some sales deterioration in just the past few days, and as a consequence, management relayed to investors that it's suspending fiscal 2020 earnings guidance for the time being. Attempting to mitigate shareholder concerns over this new and uncharted environment, the company pointed to a lack of debt on its balance sheet as evidence of its relatively healthy condition.

CFO Jay Stasz also discussed contingencies with analysts on the earnings call should Ollie's be forced to close stores for an indefinite period. Stasz noted that fixed costs currently represent 70% of sales and that this number could be reduced marginally through payroll and other cost reductions in the case of a prolonged store shutdown. The CFO relayed that the consumer staples retailer currently has $100 million of cash on hand, access to $100 million in an untapped short-term credit facility, and access to another $150 million in longer-term financing.

So management believes it could manage eight to 12 months of a store shutdown between available cash and its credit line, without having to resort to longer-term financing or perhaps even more drastic cost-cutting. It's not fun to contemplate this length of impact from the COVID-19 pandemic; nonetheless, shareholders appeared reassured on hearing Ollie's executives describe the company's ability to withstand such a scenario.


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