Q4 2019 Earnings Call
Good afternoon, and welcome to the Ollie's Park, and all that conference call to discuss financial results for the fourth quarter and full year fiscal 2019.
This time, all participants are in listen only mode.
Luckily we will conduct a question answer session and instructions will follow at that time.
Please be advised reproduction of this call in whole or impart is not permitted without written authorization from Ali.
As a reminder, this call is being recorded.
On the call today from management, or John Swagger, President and Chief Executive Officer, Ajay Stats, Senior Vice President and Chief Financial Officer.
I will turn the call over to Jean Fontana Investor Relations to get started please go ahead ma'am. Thank.
Thank you and good afternoon, everyone. Your press release, covering the company's fourth quarter and full year 2019 financial results was issued this afternoon any copies that press release can be found in the Investor Relations section of the company's website I want to remind everyone that management's remarks on this call may contain forward looking statements, including but not less.
Good to predictions expectations estimates and that actual results could differ materially from that was mentioned on today's call any such items, including with respect to future performance should be considered forward looking statements within the meaning of the private Securities Litigation Reform Act at 1995, you should not place undue reliance on these forward looking statement.
Which speak only as of today and we undertake no obligation to update or revise them for any new information or future events actors that might affect future results may not be in our control and our disgusting or SCC filing.
We encourage you to review these filings, including our annual report on form 10-K in quarterly reports on form 10-Q, as well as our earnings release issued earlier today for more detailed description.
These factors there will be referring to certain non-GAAP financial measures on todays call such as adjusted operating income adjusted EBITDA adjusted net income and adjusted net income per diluted share.
We believe maybe important for investors to assess our operating performance reconciliations of the most closely comparable GAAP financial measures to these non-GAAP financial measures are included in our earnings release, but that I will turn the call over to John.
Thank you gene and Hello, everyone. Thanks for joining the call today before I begin I'd like to take a few meant to make a few comments on the kind of virus situation first those have been impacted our and our thoughts and prayers are number one priority is to ensure the safety of our associates and customers.
Over 20% of our business falls into the Central's category and our entire organization is focused on ensuring that we get these products and continued offer great deals.
We have seen consumers buying behavior shift towards the central products and we will continue to leverage our business model to ensure our shells are properly stocked.
At this time our stores are open and we are working hard to serve our customers beginning tomorrow, we will be operating with reduced hours closing one hour earlier at eight P.M. and our first our of operation will be reserve for senior citizens and customers with underlying health concerns.
That said in recent days, we have seen increased pressure on our sales with a considerable uncertainty in the marketplace.
Looking back on fourth quarter performance. This proved to be a more challenging sales period than we'd anticipated.
We were pleased to successfully manage our gross margin to control our expenses durney different difficult sales environment.
For the fourth quarter total sales increased 7.2% as result of our new stores with comps decreasing 4.9% as we lapped a very strong 5.4% increase in the prior year and a 9.8% to your stock.
Following a very strong toy season last year, we leaned into this category again at the expense of other departments, including Housewares and books.
Had we been more balanced in our merchandise assortment and had a longer holiday selling season, we believe would've deliberately better comp.
In addition, as we've discussed on prior calls the outsize cannibalization impact primarily related to our former Toysrus sites and the record performance of our new stores entering the comp base remained a headwind during the quarter.
It's fair to say, we got some challenges in 2019 I'm confident that we have navigated through these transitory issues and of course corrected where necessary.
In the near term, we're operating in unprecedented times that are clearly dynamic and changing day to day.
Hey, significant benefit of my model is that it affords us the ability to respond to this ever changing environment.
This coupled with our strong balance sheet and liquidity will enable us to navigate the current situation situation and potential further disruptions.
From a longer term perspective, once things get back to normal our key priorities and strategies will remain the same in for good reason our model is strong and the underlying business the sound.
As we have passed this will be in a position to capitalize on the disruption we expect will occur.
For now our talented merchants are laser focused on getting the very best deals and quickly pivoting in response to what our customers need at this time their deep knowledge of the clothes that industry combined with their inside track on deals through strong longstanding vendor relationships give us a competitive edge.
This has been and we'll continue to be a key to our success.
As a way to further leverage our model for now and into the future I had been working with the merchant team to ensure we keep a little more capacity in our open to buy what I call dry powder.
So we are in an even better position to be responsive to opportunistic deals and to provide our customers with what they want and need.
This approach will allow us to jump on the very best last minute Closeouts fluoxetine departments up or down to fuel the fast trending categories. We work best when we work this way.
Additionally, the more disciplined adherence to the open to buy will benefit our supply chain and stores through a more consistent receipt flow. This will create rhetoric greater efficiencies in our supply chain and allow our stores to better merchandise and serve our customers.
As you saw in our release, we are engaged we engaged with third party to update our store feasibility study based on the results. We believe we can expand our footprint to approximately 1050 stores on a national scale up from prior to 950.
With value clearly where the customer is these days. This study further supports our growth proposition.
While we are excited about the growth prospects we remain.
We will maintain our disciplined approach the site selection and expand our and expand the to contiguous states in markets out at the gate sales an ROI, our new stores remain incredibly strong.
Weve opened nine stores so far this year and we're very pleased with the early results nearly half of our planned 47 to 49 stores openings will be a new markets and we will be well excuse me and will be supported by our recently opened Dallas Fort Worth distribution Center, we're particularly excited about our continued expansion into Texas and Oklahoma as these maher.
Markets provide a great opportunity for the Ollie's brand.
I've talked a lot about execution and it all comes down to our people our store associates distribution center employees and store support center are working tirelessly to help our customers get what they need.
We're all in it together, we have a lot of talent here at all these and I want to thank our 8700 team members for their incredible dedication and contributions to the business, particularly during this difficult period, we are grateful for all you do.
As Mark would say we are polys.
In summary, the fundamentals of our business remains strong in our model is simple we buy cheap we sell cheap this philosophy, coupled with increased focus on consistent execution tight expense control and strong new store openings has driven our business from day one.
Our ability to consistently generate free cash flow is a testament to the strength of our business model and has positioned us to weather the storm.
I'll now turn it over to Jay to take you through our financial results.
Thanks, John and good afternoon, everyone in the fourth quarter net sales increased 7.2% to $422.4 million due to our new stores.
Comparable store sales decreased 4.9% from a very strong 5.4% increase in the prior year.
Comp store sales consisted of an increase in average basket offset by decrease in transactions.
As John mentioned, we believe there was an adverse effect on sales perform performance of other merchandise categories. As a result of our outsized commitment to toys, which did not perform as expected.
We had notable comp sales decreases in housewares books, and toys best performing categories in the quarter included food floor coverings and hardware.
We ended the quarter with 345 stores in 25 states at 13.9% year over year increase in store count with a total of 40 new stores for the year. These stores are the engine of our growth and we're very pleased with their productivity and ROI.
Gross profit increased 5.6% to $165.5 million and gross margin decreased 60 basis points to 39.2% inline with our expectations for the corner.
The decrease in gross margin is due to higher supply chain costs as a percentage of net sales, partially offset by increased merchandise margin driven by improved markup.
SGN expenses, excluding $500000 of income related to the gain from an insurance settlement increased 90 increased to $95.4 million due to additional selling expenses from our new stores.
Tight expense control, coupled with lower incentive and stock compensation expense resulted in an SGN a rate flat to the prior year at 22.6% despite the drop in comp sales.
Preopening expenses decreased to $2.2 million due to the comparative timing in number of new store openings in the quarter as a percentage of net sales preopening expenses decreased 20 basis points to half a percent.
Adjusted operating income, which excludes the gain from the insurance settlement increased 3.6% to $64.1 million in the quarter.
Adjusted operating margin decreased 50 basis points to 15.2% primarily due to the decrease in gross margin and de leveraging of depreciation and amortization expenses, partially offset by the reduction in preopening expenses as a percentage of net sales.
Net income increased 0.8% to $50.3 million or 70 cents per diluted share adjusted net income, which excludes tax benefits related to stock based compensation. The after tax gain gain from the insurance settlement in the current year and the after tax loss on extinguishment of debt in the prior year increased 3.6% to 40.
$8.7 million or 74 cents per diluted share from $47 million or 71 cents per diluted share in the prior year.
Adjusted EBITDA increased 2.4% to $69.3 million in the fourth quarter for 2019, net sales increased 13.4% to $1.408 billion comparable store sales decreased 2.1%.
For the year gross margin decreased 60 basis points in 2019% to 39.5% inline with our expectations for the back half of the year.
The decrease in gross margin is due to higher supply chain costs as a percentage of net sales merchandise margin was consistent with the prior year.
Adjusted net income in 2019 increased 7.1% to $129.1 million and adjusted net income per diluted share increased 7.1% to $1.96.
Inventory at the end of the quarter increased 13.1% over the prior year, primarily due to new store growth and the timing of deal flow as John mentioned, our supply chain is running well our product flow to the stores is good and our store level inventories are in great shape.
Capital expenditures in 2019 totaled $77 million, primarily for investments in the continued build out of our third DC and new stores.
During 2019, we invested $40 million to repurchase approximately 699000 shares of our stock we have $60 million of capacity remaining under our current share repurchase program and we'll consider additional buybacks if determined to be the best use of capital.
At the end of the year, we had no outstanding borrowings under our 100 million dollar revolving credit facility and $90 million in cash on hand.
Now turning to fiscal Twentytwenty as you saw in our release due to heightened uncertainty associated with the Corona virus outbreak, including the duration and the impact on consumer demand, we're not providing fiscal 2020, earning guidance at this time.
While under review our current plans for 2020 include the following the opening of 47 49, new stores with one plant closure.
A more normalized store opening cadence with an approximate 50 50 split between first and second half openings and capital expenditures of $30 million to $35 million, primarily for new stores I T projects and store level initiatives.
To date, we are not the deviating from these plans, but we are actively evaluating and will respond to the marketplace is necessary the strength of our model and financial position make us resilient to disruption and we're focused on making appropriate adjustments in operating the business and managing cash wisely.
Once we get back to a normal environment, we expect to return to our long term algorithm.
As a reminder, this includes annual mid teen unit growth, 1% to 2% comparable store sales growth and high teens net income growth, we have great confidence that the foundation for achieving these goals is intact.
I'll now turn the call back to the operated to start the Q and a session operator.
Thank you as a reminder to ask a question you will need to press Star. Then one then you touched on telephone to withdraw your question press the pound key.
Please stand by what we compile the Q and a roster.
Our first question comes from Matthew Boss with Jpmorgan. Your line is now open.
Great and thanks for all the color.
John maybe.
John maybe can you give us some color on comps you saw in February in early March maybe before some of the more recent volatility and even more specifically just any trends you've seen outside of the geography is which I know have faced higher cannibalization over the past year I think would be helpful. If you could segment that out.
Sure Matt with regards to the first six weeks of fiscal 2020, what we have seen to start the year over the years started out a little bit slow whether wasn't necessary conducive to what we're trying to sell at that time tax returns were a little bit late not too bad.
But what we did see was the first two weeks of fiscal March we did see a nice acceleration into the business and we're very pleased with a momentum we started to pick up.
And then just this past Saturday things really started to slow down quite a bit.
With the increased heightened awareness of the the krona virus in the impacts to the overall workforce and people staying from home and all the fear as we have today. So definitely we have some nice momentum going and we've seen a pretty good tail off post Saturday of this past week.
Great and then maybe just a follow up on the margin front any change to the 40% gross margin target.
The one to one and a half SGN a leverage point multi year and then just any nuances to consider as we think about this year.
I think if you back out the impact of the the krona virus, we would be on a more normalized.
Margin for the full year and back to normal operations of the business. As we had said previously we still expect it a little bit of headwinds in the first half of 2020 odd annualized toysrus store openings on cannibalization, but we fully expect and expected to be back at the 1% to 2% comp.
Sales growth on the back half of this year and then the SGN a leverage profile has not changed either and Matt. This is Jay just to add a little additional color Tierpoint again, we're not giving guidance.
And this anything we're talking about when exclude the impact from the virus, but from the margin standpoint, as you know our long term.
Target on gross margin is the 40%. This year, we've got that third DC coming online. So typically right. We would expect that to me a 30 basis point headwind or so so we would be closer to 39 seven on a normal full year analyte annualized basis.
Great Best of luck.
Matt.
Thank you and our next question comes from Peter Keith with all these.
Your line is now open.
Hi, Thanks, guys with Piper Sandler of course, I'm just curious on.
The.
The potential for call it outsized closeout activity to emerge from this dramatic dislocation of consumer spending.
I don't know you can comment if theres been any phone calls that have already started in the last week, but maybe what I'm getting at is what would be the delay effect, where do you think like that the called the start picking up and how long would take for you guys to get.
Potential pickup of closed that inventory in the stores.
Yes, Peter that that's a hard question to answer in terms of exact timing, but I I know our merchants definitely are expecting.
To see a nice pick up in the overall canceled orders from other retailers to their manufacturers.
With the uncertainty of the krona virus and how long it's going to last I couldn't answer that question, but typically a close out does take a little bit of time.
To come about so I would expect the delay depending on what the product might be could be anywhere from three months to nine months that we would see a benefit there.
But right now I couldn't give you a lot of color on that we do expect though that we will see some benefits in the marketplace as it relates to to cancel orders from other factors are there other retailers to their factories.
Okay. That's helpful. John and maybe just looking way back investors are kind of look at how businesses performed during the last recession. If you guys would have it you know.
No the the comp performance of all these for 2008 in 2009.
Yes, Peter this is Jay like we've said before.
We're not a resists recession proof that we are certainly we feel like recession resistant in 2008, Oh, we had about a flat comp you know we did see people kind of trading down.
On to maybe try ollie's and then what we realized in 2009 is that those people stuck around and we had a strong comp our comp was about 7.9% positive in 2009.
And I think Peter what that goes to is the point that it takes times for closeouts to sometimes materialize.
And when things got tough in 2008, we started to see that flow pick up in the tail end of all weight and we saw the big benefit really in in 2009 to our overall sales impact and then the big thing was that we always talked about as we held onto those customers I in the out years and that really release was a nice thing to see.
Okay makes a lot of sense, thanks, a lot and good luck.
Thanks, Peter Peter.
Thank you. Our next question comes from Brad Thomas with Keybanc Capital markets. Your line is now open.
Hi, Thanks, Good afternoon, John and Jay.
My question was around.
The quality of your inventory today.
It is a focus by the consumer to go out and by those essential.
And I noted noticed that you had changed some of your marketing and your most recent email trying to highlights in the essential that you do have.
At the start of the year there had been some concerns that the U.S. wasn't importing enough.
Alex from China, So I guess can you talk about.
What the inventory looks like today and your ability to capitalize on how consumers are looking to shop right now.
Sure Brad the our inventory position I think we're in great shape I think the merchants have done a great job getting this in a great position for the spring selling season.
And coming out of the holiday pretty clean with regards to what we're chasing now obviously, the well call the essentials, whether it be food cleaning supplies personal hygiene.
All the consumables that consumers are currently demanding were in good shape with those categories. Those categories are moving very very rapidly.
Merchant right now is chasing the business in order to get more goods in for the consumer because that's what they're buying today. So we're we're currently evaluating our open to buy in their inventory position and potentially making some additional further.
Adjustments to towards the essential.
As we look at the next 48 weeks, but the merchant is chasing the business right now and we're doing a great job getting the inventory in for the customer.
That's helpful. Thank you ask if I could ask a follow up around.
Potentially closing stores, you're seeing a lot of other retailers closed stores for two weeks or longer.
Can you just talked about your.
Assessment of your ability to keep stores open at this time.
Yeah right now Brad we are fully open we believe we have a very strong reason to be open. We are we are we have the.
Great assortment of product a great values to customers, who need to save money and we believe it's our responsibility to do our best to try to service those customers.
We do plan on keeping our stores opened in keeping our supply chain working.
There, we don't foresee the closure of any stores at this point in time, but if things do change things get worse something happens in a certain geographical area, where we can't get employees to work the store or whatever may occur we would consider closures at that time, but right. Now we believe we are serving a great need.
For our customers and they're responding to what we have in the stores and we're seeing a huge pick up in those categories.
Very helpful. Thank you.
Thanks, Brett Thanks Fred.
Thank you at our next question comes up Scott Sick second really with RBC capital markets. Your line is now open.
Hey, guys Scot Ciccarelli.
Yes, My first question.
Got you seeing such demand an essential as like the food and cleaning products, which are obviously very popular for a lot of retailers, but I guess that would technically translate to not a lot close out inventory for those types of good. So I guess the question is where is that kind of product coming from in today's environment.
Typically Scott the close out market. It's true is trailing the current environment. So what you're seeing today has nothing to do at the close that so we have and our pipeline or that we already have in our stores.
The those those items that were typically getting our package changes or short dated product that the retailer is no longer carrying in their stores. So today, there's there's plenty of close out product. That's available. Your question probably leads us to more down six to nine months down the road.
Those essentials, where there'll be less closeouts available as we move through more product today in the I'll call. It the first quality or current environment line that may be bigger question to have where we don't have as many essential six nine months down the road.
All right that's what today, there's not a shortfall, yes, that's really helpful and I guess just a clarification on your prior comment that I guess Jay made regarding your historical.
Algorithm. So look for March 10, what kind of guidance, where you guys planning on providing to the street. If you guys kind of help us understand kind of what the original vision was.
Yeah, Scott This is Jay and I'll talk high level to some points I'm not going to go through all of it.
But as we had mentioned before we kind of had the cannibalization in the reverse waterfall impact that was occurring in the back half of last year, we expected that.
To continue through kind of the first half of this year.
So we expect a little bit of softness.
In the first half of this year call. It a negative one to a one comp maybe and then as we anniversary and got back to more normal funding again in a normal environment for back half and beyond we would've expected to get back to the normal long term algorithm from that point forward. So maybe that back half comp was a one new it too if you blend that all together.
Sure.
We probably would have had an annual outlook with a zero to 2% comp range.
Excellent alright, thanks, guys.
Thanks Scott.
Thank you. Our next question comes from Jason Haas with Bank of America. Your line is now open.
Great. Thanks for taking my question.
So can you walk us through how the holiday pointed out on the part call Ami So that your please.
So they try and but presumably things I'm, sorry to fall off the bat.
And then.
Maybe say like that that causes you to rethink.
Any of your strategy at all in terms of maybe doing online or maybe using promotions or a little bit more on to drive the common situations like that on the be real helpful. Thanks.
Sure. Jason This is John with regards to the holiday as you know there was a very short condensed selling season, having six less days this year than last year and there was a big change and the timing of Thanksgiving from this year to last year. So that the holiday was a little bit difficult to read until after we cleared all these are.
I mean night, which was until the middle of December So, we we felt pretty good.
After Black Friday, when you look at Black Friday, the Black Friday, and we felt the trends were were pretty good there.
But we didn't see the business accelerate as we expected on the on the weekend after a black Friday, we didnt, we just didn't see a lot of business get traction from that perspective, we as we as we had said in the script. We we felt that we probably little bit too heavily in the toys and took away other categories in the merchandise assortment for the customer.
Didnt help the overall.
Business with a shorter selling period so we.
We did see a better sales period in post holiday in January than when we saw a leading up to the holiday period. So we got a little bit of benefit there.
With regards to our marketing.
Strategy and changes I don't think anything was wrong with our marketing campaigns and what we do we do do TV and radio and what we call digital during the fourth quarter campaigns. We plan on doing very similar advertising as we had done this year.
In the fourth quarter.
2020, so we are looking at other means to attract new customers, which will give more color on here in the near future, but getting a little more into the digital world.
But we're not there yet to even have the discussion with anybody, but we're pretty comfortable within our marketing is working we're definitely still out an online play we have no interest to being on the Internet. So that's not a strategy that we believe messes with a close out retailer. So we're not going to be change and are looking into that as well, but overall, we just felt that the the toy business didn't come away.
We had hoped and we probably had a little bit lead too much leaving the assortment. There. So we'll adjust in 2020 to get back more to normalized.
Got it that's that's really helpful. And then I also wanted to ask just trying to think about with a worst system.
As you did have to close stores, how you're thinking about your cost structure and what costs could be caught.
I know you don't have debt, but maybe you could just kind of how much.
According to you as available.
Your revolver and if there is I covenants there just isn't there we should be thinking about there. Thanks.
Yes, Jason This is Jay I'll start and then John May want to chime in and you know, but again our goal is to is to keep these stores opened in and continue to service the customer we have seen a softening in trends of late and we're certainly you know we're doing some modeling some worst case scenarios.
And I think when we look at RPM now obviously the cost of goods sold section is largely variable when we get down to the S. DNA section.
Because we run so lean to start I would say about 70% of those costs are fixed.
So maybe not as much variability as you might think but again, that's kind of on the basis of operating stores I think if we ended up having tour chose to close our stores, we would be able to decreased costs. There certainly on the payroll certainly on the marketing.
So that that 70% could go lower we feel like if we close stores given the fact that we've got amount of over $100 million of cash today, we had 90 million at year end, but now we've got north of 100, we've got a 100 million of availability on our line of credit is virtually covenant light covenant for.
Three depending how high we borrow into that line and then beyond that if we needed to there's another 150 million of loan that we can tap into but we have an end to think about that but even just taking the cash on hand in the line of credit of 100, we think with our stores closed and obviously managing our capital.
And our expenses.
We have liquidity I would say 812 months.
Without a whole lot of.
Effort on it.
Great Thats really helpful. Thanks.
Thank you thanks, Jason.
Thank you at our next question comes from Judah Fromer with Credit Suisse. Your line is now open.
Hi, Thanks for taking my question I, just wanted to circle back on the update to the white space opportunity I'm kind of what went into that and how does it change your thinking on a your mix of close out inventory versus private label any updates on kind of the size of close out market and your potential share there.
Yes due to this is John with regards to the overall.
Changes to our overall footprint opportunity going from 952015, not not a lot of stores, but 100 stores 100 stores. So we're excited about it I think what went into it was the additional expansion we've had it in the increased our demographic profile has opened up the the space a little bit to have more store opportunities.
With regards to sites in the United States, We do think there's probably a little bit below your bigger footprint than the thousand 50, but that's far enough. That's a big enough number for us to continue to focus on getting to that and we'll see where we go after we get to there with regard to has not changed our overall thought process to close outs.
Process for close outs as remain the same we want to be.
Ideally, 70% closeouts, 30% everyday value in imports.
We would think as we said previously at 500 to 600 stores, we might have a slight decrease in overall close out mix.
But I think the consumer probably would not notice that we do it each and every day, we know how to make sense to close out versus a non close out we have to import product that's important to us.
So we plan to doing the same exact execution for merchant side and the overall store opening cadence in the number of stores were opened that would not change our annual opening cadence as well. We just opened in the mid teens and once we had 50 to 55 stores year, maybe just a pure number that we open okay got it and just a follow up on that have you seen any change.
In the competitive environment for close and I mean, I mean, you see headlines are retailers talk from time to time about potentially leaning into that.
Ill, but are there any big competitors on your radar has of availability changed at all.
Not seen a material change at all there there is a in an abundance of closeouts for our merchants to capitalize on so competition wise no one's really stepping in that's that's on a on a large front this cause us any type of problem.
Thanks, and good luck.
Thanks, Jude Thanks Jude.
Thank you. Our next question comes from Paul The Katz with Citi Research. Your line is now open.
Hey, guys, Paul as you might.
Just wanted to touch on that larger store count target as well.
Treated follow the year that you did have some supply chain and cannibalization issues. So just wanted to.
Hey, how are you get comfortable with the supply chain necessary to.
Core store fleet that size.
Maybe if you could talk about distribution center needs over overtime, what the plan is there and I am curious present, you know situation aside I'm curious about how you do you think about.
The cannibalization as you grow stores anew.
You increase your penetration in certain markets.
We plan for cannibalization thanks.
Sure Paul with regards to the overall supply chain.
Last year's issues that we came across I would say or our were mainly self inflicted where we got a little bit heavy on the open to buy we didn't appreciate the significance of the new store openings that were required in Q1 with the the heavy front load of the Tories are toysrus sites, so that doesn't give us any hesitation to get to 1050.
Stores on a go forward basis, as we said we opened up our third DC in the Fort worth area here in February which is another channel. The just opens us up real wide up from a servicing perspective.
And the ability to service the stores is there and that's not a problem for us we do see nationally that we'll probably have anywhere from five to six Dcs when it's all set all done to service our stores.
But the supply chain in servicing the stores as we grow to thousand 50 will not be an issue from our perspective.
With regards to the cannibalization I'll take part of and let Jay finish it but.
We we do believe that the cannibalization impact of our growth and as we backfill as we continue growing the white space will be very much more normalize to how it had been prior to opening up all the to your you sites from last year, and we believe will navigate right through that and that will not present, a problem for us to be able to deliver the 1% to 2% comp on a long term algorithm basis.
Okay, you have anything into it or no okay.
Okay.
Thanks, Paul.
Thank you. Our next question comes from Simeon Gutman men with Morgan Stanley. Your line is now open.
Thanks.
Good afternoon, everyone. You mentioned the businesses more recently under some pressure can you share what that run rate is I know it may not be very telling and then related to it what is your base case I realize we can't really talk numbers since there's no guidance, but do you expect it to get worse for how many weeks and what point are you expecting in your base case for.
For for trends to normalize.
Simeon this is Jay and I'll start with that and like we said I mean just.
Late last week in the first part of this week, we have seen trends change and it has been a very volatile environment.
We've seen negative 10 comp days, we've seen negative 20, so I would say.
Recent trend is negative 10% to 20% comp.
And kind of getting the good news for us is that because our stores are still profitable and because we run so lean if we start to.
Kind of do Doomsday scenarios, we can handle a pretty sizable decrease in our comp and still generate cash.
And still being a good position from a liquidity standpoint.
As far as how long this is going to last or really what the bottom looks like.
I don't think anybody can predict that.
It's virtually impossible I think like John said, we we carry essential we meet the definitions that we've seen out put out by the states in regard to food in regard to cleaning supplies in regard over the counter medicines. So we're comfortable.
From that standpoint, we can continue to operate and as John said, if you. We obviously want to take care of our employees and the customers and if they're willing to come in and we can do that and everybody is healthy we're going to continue forward and I think I think certainly in if I think what the professionals are saying is probably six to eight weeks.
To clear this so that's that would be my suspicion that we'll see things getting more back to normal I think every day, we'll get more and more back to normal after we hit the peak whatever that may be but I think I think we're we're we're we're poised to take advantage of it and we'll be ready to go when when the customer comes back and light gets back to normal.
Yes, it's all reasonable and then I think someone asked about expenses and toggling them in a different environment can you share or wasn't asked about the mix of variable versus fixed and if you can share that with us.
Yes, what we did say that on the call earlier I mean, the cost of goods sold this is largely variable variable we've got a small portion of our Dcs in there.
For the leases that will be fixed, but a very small piece of that call. It 3% to 4% and then on the SGN a.
Our fixed pieces and little higher than most people would think just because we run lean already so I would call it.
70%.
Initially as we operate stores, but if we had to peel. The onion. If we stopped operating stores certainly I think theres cuts that we could do to drive that percentage down you know maybe to the 50, 60% range.
Okay. Thank you very helpful.
Thank you.
Thank you. Your next question comes from Edward Kelly with Wells Fargo. Your line is now open.
Hi, guys good afternoon.
Just wanted to come back onto the store footprint and the decision to raise the target.
Could you give a little more color on the challenges and how I guess really kind of how things change as the business sort of scales overtime and so you talked about the close out.
Mix not changing as much on a per store basis.
But that's the complexity of merchandising change.
Can you source close out product consist so that said at the stores can be merchandise consistently.
Across the entire the entire store base or.
What things look differently store to store.
I think Ed we've we've covered this a few times I would tell you I think that we feel pretty comfortable that the amount of close out merchandise. This out there in the marketplace in the overall size the market, which I think is north of $60 billion.
With our company size, even a full maturity.
We'll be call it a four and a half billion dollar chain.
I don't foresee a problem finding the closeouts and keeping a consistent assortment what we've learned as we've grown our store base with the major manufacturers have their own distribution centers throughout the United States. So as we grow we line up more into their distribution centers and rail the more and more of their product into our stores have a consistent assortments.
So we've learned that as we've gotten bigger it's actually become a little easier to have consistency throughout the stores. We do feel a 500 600 stores there might be a little break there to where we have to augment a little bit but that's more on a category basis, we do think theres a lot of continuity.
Even as a store store base gets larger even closer to 1000.
We just don't we don't see your world, where folks are now in the three to 500 600.
I continue to push through that but I don't see a big change and the overall sort mini consistency in the stores as we continue to expand.
Okay, and then just a follow up as we think about.
This infrastructure systems technology sort of support.
Can you just talk about the investment over time, you know necessary to support the business as it grows.
As anything really need to change.
And then you've been leveraging.
She had eight with it I don't know flat one comp cannot continue.
As you continue to grow or does that edge up overtime, just just sort of thoughts there and how we should be thinking about it.
So yeah I'll start I think from the comp standpoint, I mean, our expectation.
Is that as we continue to grow that will you would be able to leverage at that same 1% to 2% comp.
You know there'll be some investments along the way you know for leadership are people, but nothing material I think from a system standpoint.
Our typical capital spend when we're not putting in a DC is call. It 1.8 to two for 2% of revenues.
About 65% of that is related to the new stores that were building.
And there's there's not a whole lot that goes into our infrastructure really we're pretty well set from the infrastructure standpoint, both from a DC standpoint.
And the store Pos system standpoint, we run J.D.A., which is world class for inventory management, and we utilize that across our supply chain as well as.
Back of house for our ERP is wells for Pos.
And then inside the Dcs people.
Don't realize that were pretty state of the art with the machinery and the conveyors that we've done in those as well.
Okay had already our largest investment that will probably be always focus on the distribution center and supply chain because that as we continue to grow and add those strategic assets, that's going to be a big big amount of capital as we do those.
Got it thank you.
Thanks, Ed.
Thank you. Our next question comes from Anthony Chukumba with loop capital markets. Your line is now open.
Once again, our next question comes from Anthony Chukumba with loop capital markets. Your line is now open.
Thanks, Sorry, I had myself when you just wanted to see if we can give just a little bit more color in terms of the.
Merchandising issue.
So much in two ways of expensive housewares and books and just I just want to get some more color in terms of how you came to that decision and like what you might do differently or what went wrong.
And what your expectations were you made that decision. Thank you.
Sure Anthony as most of Us no.
2018 was a record year for toy sales for not only us probably for every other retailer who carry toys, what the bankruptcy of poised for us.
So we had a great comp when we came out of a 5.4% comp for that season, and we really felt that we could lapped those say those sales and mark in the merchants invested very heavily into the toy category in 2018.
And what it off when all the dust settled and you look back on it and you're able to evaluate it we probably lean lean did a little bit too heavily for what the market was going to buy from us and we didn't have as many customers as we did back in 2018 buying the toys.
So that that that took away footprint in the store, which obviously your other departments. So on a go forward basis, where we're going to of course, correct that action and we're going to back toys back down to more of a normal normalized number that we're used to seeing and continue to invest in categories for the holiday season that will move the needle as we as we round the corner here and.
2020, so that's a lesson learned not nothing was real wasnt <unk> wasnt terrible, but we just mr. by a little bit. So we'll corrected we won't expect that toys will be stronger in 2020, there wasn't 2018 so.
We were we feel pretty go we're standing right now.
Thank you and we have a follow up question from Jason Haas with Bank of America airline is now open.
Oh, great. Thanks for letting me back.
Another question I was curious for Fourq you could in the past you've been pretty helpful breaking out.
And the headwinds to comps in terms of.
Cannibalization in reverse waterfall. So I was curious if you're able to give us any.
Portion of kind of the magnitude of selling days versant Watson toys that versus the cannibalization or verse waterfall. It would be helpful. I understand thanks.
Yes, Jason this is Jay and.
Really the peaceful spread slid out for you a little bit is the.
Cannibalization in the reverse waterfall, we've talked previously of that being approximately 150 to 200 basis points, we did see it less than a little bit in the fourth quarter not a ton, but it's probably in the range of 102 150 basis points.
You know just because those two or a lot of those stores were a little mature and we were getting past some of the stores coming in and the company. So for Q4, that's what we experienced and as we you know the first half.
Until we get through all the anniversaries, especially on the toys R. US sites in the first half of this year, we would expect.
That same level hundreds of 150 and really our goal and I think John maybe mentioned this on an earlier call is that once we get to the back half of next year I mean, it's something we've got to deal with we understand that.
From a cannibalization standpoint of course and from a reverse waterfall standpoint, if we opened strong new stores. That's a problem we're willing to live with when they come in the comp base, but.
It's part of a growing company in our goal is really not to be talking in a whole lot about it on a go forward basis. Once we get passed this first half.
Great that's helpful. Thanks.
Thanks, Jason.
Thank you and I am showing no further questions in the queue at this time I'd like to turn the call back to John for any closing remarks.
Thank you operator.
Thanks, everyone for your participation continued support we look forward to sharing our first quarter results with you on our call in early June.
Ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.
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