Q3 2020 Ollie's Bargain Outlet Holdings Inc Earnings Call
Good afternoon, and welcome to Ollie's bargain outlet conference call to discuss financial results for the third quarter of fiscal 2020 at.
This time, all participants are not much not only mode low.
Later, well conduct a question and answer session and instructions will follow at that time. Please.
Please be advised that reproduction of this call at whole whole or in part is not permitted without written authorization from all of us.
As a reminder of this call is being recorded on the call today from management are John Smith, President and Chief Executive Officer, and Jon says Senior Vice President.
And Chief Financial Officer.
I will turn the call over at today's Montana Investor Relations to get started please go ahead of them.
Thank you and good afternoon, everyone at press release, covering the company third quarter 2020 financial results was issued this afternoon and a copy of that press release can be found at 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 limited to predictions expectations or estimates.
At actual results could differ materially from those mentioned on today's call any such items, including with.
With respect to our future performance should be considered forward looking forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995, you should not place undue reliance on these forward looking statements, which speak only as of today and we undertake no obligation to update or revise them for any new information or future events factors that might affect.
Actual results may not be at our control and are discussed in or at SEC filings. We encourage you to review these filings, including our annual report on form 10-K, and quarterly reports on form 10-Q as of all of their earnings.
At least issued earlier today for a more detailed description of these factors, we will be referring to certain non-GAAP financial measures on today's call such as adjusted EBITDA. Adjusted net income at adjusted net income per diluted share that we believe may be important for investors to assess operating performance reconciliations of the most closely comparable GAAP financial.
Measures to these non-GAAP financial measures our income.
In our earnings release with that I will turn the call over to John.
Thanks Gene at Hello, everyone. Thanks for joining our call today, we hope at you and your family sustained healthy in sales.
I want to express my gratitude to the entire always family for their tireless work to serve our customers well maintained a healthy and safe shopping environment.
That has been and remains our number one priority.
The teams efforts and ability to rally together during these times has been nothing short of extraordinary.
Our results were made possible at the steady execution of resilience of our entire organization. The merchants our distribution center teams the store support center at our store associates I sincerely, thank each and every one of them.
We delivered an outstanding third quarter.
This strong performance reflects our ability to react to opportunities in the marketplace and changes in consumer demand even during these challenging unprecedent at times.
Our overall performance was driven by robust sales growth.
Great deal flow productive new stores in strong comparable store sales drove a 27% increase in our topline cash.
Apparel store sales increased 15.3% in the quarter.
This topline growth combined with gross margin expansion and tight expense control led to an adjusted net income growth of 61%.
Our sales were once again broad based with almost three quarters of our department is comping positive.
Our top performing categories were housewares, Bedenbaugh health and beauty AIDS flooring and food.
While we cannot predict at direction of the pandemic from here, we remain laser focused on the execution of our plans.
As you know at all begins with amazing deals.
Deal to provide incredible value store customers across all of our merchandise categories.
The merchant team continued to leverage our strong longstanding vendor relationships for product in sourcing from new vendors for.
For instance, we worked with a new major supplier of over the counter cold cough and flu medicines, they really good good.
Our scale owner of visibility makes deals like this happen.
The merchants are continuing to identify and stores great deals of deliver exceptional value to our customers.
Deal flow remains as strong as ever close at opportunities are generated in variety of ways ranging from excess inventory overruns and package changes to product innovation and bankruptcies, we're seeing large deals each and every day and we are well positioned to capture these opportunities.
We have the long term vendor relationships the proven ability to handle large deals at an exceptionally strong liquidity position to make it happen.
In terms of on hand inventory, we chase the business a little during the quarter due to our continued sales velocity. We are pleased with our ending inventory position of two and a half per cent compared to last year.
There's tons of product flowing we are increasing receipts and pushing product or distribution centers and it sort of stores at record levels, even in the midst of the busy holiday selling period.
Having said all of that my end goal is to run with less inventory per square foot than we have historically averaged well managed leaner inventories give us the flexibility from an open to buy standpoint to ramp up receipts for opportunistic purchases.
Maintain this dry powder allows us to more quickly respond to changing consumer demands as well as demonstrated by our success over the past two quarters.
I believe our customers also benefit from reduced store inventory levels at with an improved shopping experience at crystal clean store.
Fresh new deals are in front of the customer presenting a call to action.
Ollie's Army continue to be at big driver of our sales in the third quarter of membership just keeps growing.
This was the second biggest increase of new customer sign ups at Hollys history.
We ended the period with 11.4 million active members, a 13.9% increase over the prior year, new customers have contribute to the growth of the Ollie's Army numbers and it helped drive increases in sales and transactions.
We're very excited to have these new customers enlisted in the army. We will continue you utilize the tools, we have for onboarding, including especial benefits such as unless one of bonuses and communicating our new and exciting deals to ensure these customers become long term Ollie's Army members.
As we've stated in the past Army members shop, our stores more often and drive of substantially larger basket.
We are in the early stages of enhancing our marketing programs and redeploying dollars to optimize spend.
Our focus continues to be on deepening engagement with existing customers as well as attracting lookalike customers.
We have been pleased with the early read so far and we'll continue to test some new digital initiatives such as customized ads. We will continue to test learn and ramp up were tactics, our most successful and dollars best deployed.
We're also making a change to our event calendar this year due to the pandemic.
Instead of Ollie's Army night normally one exclusive eating of shopping for army members, we're going to have Ollie's Army week with the same space reward for the members as always the then will run from Sunday December 13th through Saturday December 19th giving customers an entire week to get great deals importantly, the weeklong event will be safer.
Our associates and our customers.
This year.
The financing this would just be stretched out a little bit longer.
Our new stores continue to be significant driver of our growth new store performance in the quarter end year to date exceeded our expectations. We achieved these outstanding results, even with limited marketing events as we sought to comply with social distancing guidelines.
We have opened a total 46, new stores this year, including one relocation and I'm very proud of the team's ability to execute these projects. Despite the added complexity of opening and operating during the pandemic.
We are a growth company one of the most attractive sectors in retail at the close at industry and we believe we have the scale the know how and their relationships to benefit from the continued disruption in the marketplace. We are laser focused on expanding our retail footprint and we believe the extreme value proposition of our business model very much supports our growth plans.
With tremendous runway for growth growth. We are excited about the availability of great real estate sites as we continue to build out of store pipeline. We see we see new stores is an important component of our long term growth algorithm with a target of 50 to 55 stores per year.
Our 2021 pipeline looks strong with a solid mix of both existing and new markets with expectations of 50 store openings, including up to four relocations.
Turning to the fourth quarter.
Our comp stores moderated in the latter part of the third quarter and continue to do so now with quarter to date positive comps in low single digits, Inc.
In the first few weeks in November we saw some impact from the timing of our pure promotional calendar is around black Friday, as well some impact and cold weather categories.
We were pleased with Black Friday weekend sales as they were in line with our expectations.
As Mark would say, we are locked and loaded for the remainder of the holiday season.
We have a lot of big weeks ahead of US include Ollie's Army week, beginning December 13.
There remains a great deal of uncertainty related to covert and we cannot predict the impact of the continued health and financial crisis on consumer behavior as always we will tightly manage what is in our control and we feel very good about our ability to provide great holiday deals to our customers.
We'll continue to do what we do best stay focused and execute looking.
Looking ahead, our long term growth algorithm, we remains intact and I am bullish as ever about the future prospects.
It was one year ago that we don't expect any loss or co founder CEO and friend Mark Butler Mark.
Mark was passionate talented in a highly regarded leader loved and sorely missed by the entire ollie's family.
I know mark would be proud of how we have rallied together to carry his legacy forward so successfully.
I could not be prouder of how our business in team has responded over the challenge of years since Mark passing.
Want to thank our almost 11000 team members for all they're doing to serve our customers and communities of support each other during these demanding times.
As we say.
We are colleagues.
I'll now hand, it over to Jay to take you through the financial results.
Thanks, and good afternoon, everyone like John I also want to express my gratitude to the entire ollie's team for their amazing dedication and teamwork. We appreciate all that you do.
We're very pleased with our third quarter results net sales increased 26.7% at $414.4 million comparable store sales increased 15.3% in the quarter driven by increases in both average basket and transactions.
During the quarter, we opened 19, new stores, including one relocation ending the quarter with 385 stores in 25 states and an 11.6 year over year increase.
Since quarter end, we've opened four more stores for a total of 46 new stores for the year.
Our new stores continued to perform above our expectations across both new and existing markets.
Gross profit increased 28.7% to $171.5 million at gross margin increased 60 basis points to 41.4%.
The increase in margin was due to improvement in the merchandise margin, partially offset by higher supply chain costs due to increases in domestic and import carrier rates and additional DC operating cost driven by continued labor and wage pressures.
<unk> expenses increased 17% of $105.8 million, primarily due to additional selling expenses from our new stores and higher store payroll to support the increase in sales.
As DNA as a percentage of net sales decreased 220 basis points to 25.5%.
The decrease was driven by leverage in occupancy in many other costs due to our strong sales performance and continued tight expense control.
Operating income increased 61.7% of $57.8 million in the quarter from $35.7 million last year.
Operating margin increased 300 basis points to 13.9%.
Adjusted net income, which excludes tax benefits related to stock based compensation increased 61.1% to $43.2 million from $26.8 million last year.
Adjusted diluted earnings per share increased 58.5% to 65 cents from 41 cents in the prior year.
Adjusted EBITDA increased to $65.3 million from $42.6 million end adjusted EBITDA margin increased 280 basis points to 15.8%.
Capital expenditures in the quarter totaled $7.8 million compared with $24.2 million in the prior year.
Last year expenditures included approximately $13 million for the construction of our new DC.
At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $326 million in cash with our very strong balance sheet and robust cash flow, we have the capacity and flexibility to navigate these times.
While we are optimistic about the momentum of our business. There is increasing uncertainty related to COVID-19, and its potential impacts which could affect consumer demand for these reasons. We are continuing our practice of not providing specific guidance for the balance of the year.
As always we remain confident in our ability to execute we have delivered great results in both strong and challenging economic cycles. We looked at maintained consistent gross margin performance and closely manage our expenses just like we always do.
The flexibility of our business model enables us to pivot quickly when navigating uncertain times and our strong results demonstrate this.
The strength of our model and the opportunities for new customers deal flow in real estate that we expect to capture from this environment how of US even more excited in our long term growth algorithm and is well positioned as ever to grow to our target of 1050 stores.
I'll now turn the call back to the operator to start the Q and a session operator.
Thank you [laughter] cash.
Ask the question you any depressed Star then one of your telephone to withdraw your question. Please press the pound King.
Our first question comes from the line of Matthew Boss with JP Morgan. Your line is now open.
Great. Thanks, So John maybe could you speak to the cadence of comps. The Threeq you progressed, what do you think drove the magnitude of deceleration in November maybe if you could just touch on transactions versus basket or by category and how are you thinking about the remainder of the fourth quarter.
Yes, Hi, Matt This is Jay and I can speak to some of those metrics and John will chime in as well, but at the third quarter was a great quarter. We saw very strong performance in the first two months August September you know probably in the high teens close to 20% comps and then like we talked about in October we had so.
Of moderation of man and part of that a large part of that was driven by a shift in of promotional calendar, our mail or went out one week later year over year. So that was an impact in October and then you know obviously, we've talked about we disclose what the trend is so far for this quarter and you know there's a few factors of.
Play there certainly the cold weather the low.
Lack of cold weather is not helping us and also we think we kind of stick to our roots in terms of of the door Busters on Black Friday, and we know the other retail is really spread that out.
Over the course of the month. So we think those are the biggest drivers, but we really feel very positive with where we are now and really ready for the rest of the holiday season, which is big for us and with that I'll, let John at some downtime at I think I think Jay is spot on with at the one thing at the one take what I would tell you is we do believe that we are locked and loaded for the remaining holiday period, and we think we're in a good.
Action to capitalize on that so we feel good where we're sitting right now and I think that the the timing of how the the Black Friday ads were run by the Big box retailers had some impact on us and cold weather definitely hit our outerwear apparel and obviously our heater sales. So we were locked and loaded with those I think will look we'll come out of a pretty good for the remainder of the quarter.
Okay, Great and then maybe a follow up on the gross margin could you just quantify merchandise margin expansion in the third quarter and how best to think about gross margin in the fourth quarter relative to the 60 basis points expansion that we saw in the third quarter.
Yeah, and the third quarter, we were 60 basis points higher year over year, and 90 basis points of that was improvement on the merchandise margin side.
So you know I think and I think you're asking about Q4, I mean, we're not giving guidance, but certainly you know margin is the one thing that we've talked about before kind of targeting that 40%.
And this year you know we're going to shoot for that I think we are experiencing pressure on the supply chain side, certainly with them at the transit as well as on the labor front end or D.C.'s, but we're still thinking that we're going to be in the ballpark of call. It 39.8 of 40% growth.
Great Best of luck guys.
Thanks, Matt.
Thank you. Our next question comes from the line of Scot Ciccarelli with RBC capital markets. Your line is now open.
Hey, guys. So before this year, you've had pretty steady as she an $8 per store, obviously incurring extra expenses. This year end coded hazard pay et cetera. As you kind of think about 21 should we kind of at gear. Our models back to what we had been seeing in 2019 or just kind of a step function increase.
It's in cost you can just help us out with what would that piece.
Scott. This is Jane you know were not given the uncertainty we're at we're not talking about Q4, we're not really giving guidance for.
For 21, but no we expect.
To kind of get back to the normal SGN a going forward is how we would think about at I mean, certainly there are some moving parts.
With the premium pay which we've incurred in Q3, and we would expect to continue at some level. We haven't made a determination about next year and I mean, there is a lots of moving parts. There you know, but I think on a normalized basis generally speaking if you look at 19, I mean, we tend to be around 25% on a full year basis, and we would expect from of based modeling.
Standpoint to be in that arena, I would say and obviously, you then sales going up or down a impacts at.
Well, Okay, and then just to follow up on that question can you remind us of the cadence of for Q last year.
Of the comps.
Yes.
Yeah, I don't think we've disclosed that we haven't really gotten into the cadence by month end of quarter.
No. Okay. They are important you've got with the negative four nine for the month or for the quarter.
Yep got it thanks.
Thank you. Our next question comes from the line of Chandni Luthra with Goldman Sachs. Your line is now open.
Hi, Thank you for taking my question could you give us some color on traffic and ticket trends into at quarter end and how that has trended into fourth quarter.
Sure I can talk about the third quarter and like we said I mean, we saw increases in both of it was really the 15.3% comp was driven by average basket about 75% of the 15 three was driven by average basket and 25% was driven by an increase in transactions.
And we're not talking about we're not we're not going to disclose of fourth quarter trends.
Got it and then could you perhaps give us an update on what you're seeing in the flow South fight line you could be spoken about may copy of piano are there any signs of developing GAAP.
Oh, My God, even bothered me should mean interest instead of going to 2021, well instead of possibility that demand is so low boss can be there that you know.
They're not really a lot of close out deals out there to do.
To get to.
Yeah, I would I would tell you that I believe that regardless of the word mega deals that I put out before the close of the industry is as robust as ever our merchants each and every day are collapsing on a lot of closeout deals. There are still a lot of I'll call of uncertainty in the marketplace. There's still a lot of deal flow out there of the bank.
She's of happened Theres, a lot of excess inventory.
That has been.
Canceled by other retailers, so that the close out.
Environment is robust at its ever been the Mega deals that I've talked about before I think those will come in due time I believe there is a lot of things happening right now where a major manufacturers are producing to try to catch up with the demand and they never get the timing right on there. So there will be excess inventory coming to us I may not be as early as I had hoped but I think at all.
Becoming to US next year as well, so I feel very bullish on the close out market.
The merchants are having very much success on getting product for each and every one of our departments. So theres no. There's no real pockets that were missing any inventory in or any deal flow. So so we're very excited by force it today.
Great. Thank you.
Thank you.
Thank you. Our next question comes from the line of Randy Konik with Jeff.
Yeah. Thanks, a lot so sean any impacts on the communication of Ollie's Army week instead of day that may as kind of impacted the performance of the business. Thus far in the current quarter in your view at all.
Randy at that that's a great question I'm I'm not sure if it has or not but we're giving the shoppers were giving them normally give them for hours and one evening to come to the store at its a mad house and now we're going to give them a full week to shop. So it's possible. It's very possible, they're gonna have <unk> of seven full days now to use that coupon did too.
Good day, some pretty big discounts on toys and Christmas and also the rest of the store. So it is very possible. That's part of why we feel we still feel very bullish on the back half of the the quarter here. So there's a lot of volume to do there's still three huge weekends to come. So recent trends would tell us that we feel very good and we're seeing some day.
Nice nice responses here post Black Friday, So I think we are locked and loaded ready to go.
Perfect and then as you think about your comments around the close out by industry being as good as it's ever been and you're at you saw merchandise margin expansion in the in the current quarter. How did how did you think about just general merchandise margin opportunity. You know go forward I know, it's obviously depend on deal by deal basis, but just.
General do you feel like you still have kind of room in that line item to kind of moves to expand store. There just give us some thoughts there on holistically, how you're thinking about at a little longer term.
Yeah, I think Holistically weve built a model that were always shooting for a 40 point gross margin.
We're not looking to expand our margin we always have the the thought process that if we're doing better than the 40 points, we normally get back to the consumer we think building the building the brand to build the loyalty is more important than we have great operating margins with a 40% gross margin. So there's no need to expand that if we can if we can cover our impacts on the supply.
Chain of still deliver 40% gross margin to the shareholders were very very pleased with that so that's really how we manage the the margin doesn't work out that way every single quarter, but that's what we shoot for on an annual basis, Yeah and Randy. This is Jay just attack into that I mean.
You know obviously this environment now at an even next year is going to be a lot of uncertainty, but you know when we talk about longer term and we we talked about the long term algorithm of this business. It is fully intact and you know it's very consistent with what we've always done we expect that to continue and in fact, you know the just overall positioning.
We expect to get a lot of good deal flow and kind of a lot of good real estate deals we are getting new customers right. Now. So we think all of that sets us up very well you know we're very excited about that in terms of delivering the long term algorithm.
On a long term basis.
Thanks, and just lastly, you know it looks like the balance sheet as of war chest of cash and looking at end deal to send people at position with a lot of cash let's.
Let's see if your capex needs of Don Downs, we've gotten through the the hump of the new distribution Center expense Yeah. How does the board think about proper cash cushion at this point ill just give a little flavor of how we should be thinking about just cash yield when isn't enough cash enough at this point and what do you do with excess cash.
Yeah, Randy this is Jay and right now and it's something we talk about with the board at every every quarter at our meetings and it's a great problem to have building net cash, but right now given the uncertainty in the environment and the pandemic. We think it's it's most prudent to remain conservative with our cash and remain liquid with that for a number of reasons to chase big deals.
Just to keep our flexibility.
But as as we get a little more certainty.
In the environment and net cash continues to build you know what we talk about is doing stock buybacks in an opportunistic nature.
And so I think when we are ready and again I think really we need the atmosphere around coven and and everything to settle a little bit of but once that happens you know that's when we'd get in the market from a stock buyback standpoint, we also have other capital needs not immediate term, but certainly we can lean into of refreshing some of our stores, we could gotta DC.
On a in a couple of years on the horizon. So there are some other uses for cash in the relative near term.
Randy we will be afraid to put it to work of we need to so it's there and then we need to do something with that we will.
Got it thanks guys.
Trading.
Thank you our.
Our next question comes from the line of Peter Keith with Piper Sandler. Your line is now open.
Hi, Thanks, good afternoon, and thanks for taking the questions at.
First on the <unk> on the close out a backdrop, John there's certainly some chatter on wall Street at that maybe the close out environment is at really happening or it's really not all of this cracked up to be that we thought a couple of months ago.
At I. I guess, there's observations that maybe some of the items at your stores are circulars just haven't changed that much could you just provide us day was more tangible examples of where you're excited at and then maybe that's just calling out categories, where you're seeing some some elevated deals or where are you at some specific products that would be very helpful for us.
Yeah, Peter I would tell you we don't feel that at all we feel that the deal flow is as strong as ever and I think that our our assortment in our stores and the mix on our Flyers is better than ever as well I think with given that the consumer a lot of different opportunities. This year than they might have had last year in different categories, and and we see that with the sales force.
There are certain categories last year that are that were up that are down this year of as we're moving things around and providing a different different assortment to the consumer. So I would tell you we're not seeing any pressure of getting goods. There's a couple of pockets here and there that our consumable nature of that things are not readily available as they may have been last year, but that happens to us each and every year and the close out said.
At or so so we're used to dealing with that of working with it but where we're seeing a lot more opportunities in a call at the mattress business. Our furniture category were seeing deals and sporting goods were seeing scrap booking deals.
We're seeing the additional children educational book deals come through Kandi has been real strong this year as well. So there is a lot of variety of that's coming through the business. We've had some some major deals on flooring bedenbaugh. So there there there is not a shortage of of opportunities out there for us at all the merchants are.
Continuing to push.
They're they're they're they're bought correctly to our open to buy number. So so we're excited where we're sitting in the merchants are doing a great job sourcing products from existing vendors end new vendor. So so we're seeing we're seeing good flow across the entire board I think the stores look a lot better than they have historically, Peter and I think I know you're in the stores quite of.
But we we eliminated most all of the top stock in our stores. So that you could actually Walker of stores and you can see from end to end at I think because of customer a brighter shopping experience in the stores are getting goods the floor of much faster. They have historically, so work side of where we're sitting today.
Okay. That's helpful color John.
And then.
To focus on the on the near term so much but your stock is indicating down here aftermarket.
The slowdown in November Debbie contemplated at just the lack of end of an E com strategy as maybe at this particular point in time also having a negative impact of maybe that lack the low.
Yes, as we get to the holiday season.
Yeah, I think I think obviously the more models not an E com strategy model. So why why there was a of increased spike in Covidien they'll call you know spike number two we definitely feel that there are some people who stayed away.
From the brick and mortars and shop more online, but that's really not the feel of we play and we do believe that's temporary in nature doesn't bother to so I think we're we're positioned very very well we're learning a lot throughout this process and our model is very resilient. So I think we've already started to see some trends pop back pretty well on us and we think we're positioned well for the remainder part of the holiday So I think of.
It's very temporary in nature of where we're going to capitalize once again that the treasure Hunt experience of we offered to the consumer you cant duplicate that online.
Okay. Thanks, a lot for all of the color guys. Good luck with the rest of the holiday season.
Thanks, Peter Thanks, Peter.
Thank you. Our next question comes from the line of Brad Thomas with Keybanc Capital markets. Your line is now open.
Hi, Thanks, Good afternoon first a question on inventory.
You all obviously had been chasing the business a bit here of late and Siemens better position at the end of this quarter than you were after last quarter, but still feels like you.
You didn't quite have inventory that you want it what categories are you seeing that in most where you are having trouble and can you talk a little bit more Jonathan you talked about running a little bit leaner from an inventory standpoint going forward than you had in the past can you talk a bit more about that.
Decision. Thank you.
Sure Brad I would tell you I think that we were real real close to being right, where I want it to be at the end of the third quarter up 2.5% seems light, but the prior year, we were actually up 7% of over.
Over the prior year, so I think we're positioned pretty well here I'm sorry, we were up 15.9% last year and that was of that was that was as mark will say that was.
Real good with what we used to do.
I don't believe we need to carry as much top stock at our buildings I believe we had anywhere from.
$5 $6 $7 per square foot in a building and of building on top stock that was not sellable in a box that doesn't do a retail or any good at all to have to have inventory sitting there that's non non productive at all so I when I when I took over I admissions at right of way that I was trying to get more dry powder and the business and start.
Work with less inventory of.
Kobe help accomplish that much quicker than I thought we could.
But I really think that us after we cycle that we've got a cycle of fourth quarter and the first quarter of next year that I would start to see of start to be pretty much flat year over year at inventory Q2 might be up a little bit next year over where we ended this year of as we were really.
Caught by surprise on how much we didnt accounts for 43% comps, but I would think next year coming over at coven against three Q3, I think we'd probably be 13, 14% over with our store growth from this year, but I think were right in line with where I'd like to see us in inventory could it be 4% versus two and a half maybe but it's still a material, saying we're at the disk.
Cash and I think that all of our departments are real good shape. We're.
We're not really missing any categories that were light in the missing business. We're right in line with an open to buy pretty much in every single category we have.
Great and a follow up if I could on on the Ollie's Army event.
How are you thinking about the potential.
Gross margin implications of having a promotional of that running a whole week rather than one day.
[noise], Brad it could it could be it depends on how well the event and how successful. It is it could be a big number but I think we've got at baked into our expectations I think we're okay.
Going to be at time be a real negative from what we're expecting to see for overall fourth quarter.
Got you. Thanks, so much and good luck.
Thanks, Brad.
Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. Your line is now open.
Hey, guys. Thanks for taking my question. My first question of another short term one on a quarter to date and I guess the end of the Q3 can you talk about is there a normal flow in early November at were November for you over the past few years as it gets sort of pre holiday earlier and earlier and at the this just match up.
Similar to other one was there anything in October.
Got you so as far as product changes or category changes that you know that that you could see some shift happening in consumer spend at this was sort of coming.
No I think October was moving wasn't Jay had mentioned earlier was a little more self inflicted we actually ran our mail or one week less this year than last year and that was by design. So that didn't help the the court. They ended the quarter out very much so and I do think there there was a natural we saw natural slowdown even from Q2 into Q3 of those stimulus.
It was running off and the lower income folks, where we're running a little bit lighter on the money from some of the money piece of that started to tell enormous there, but I think I would say October was pretty much self induced ourselves.
Nov is a little hard to answer because last.
Last year was against prior year, we had a whole week shift of Thanksgiving. So there's not a real great.
Cadence from 2019 to 2018 and 2018, we had the impact of the toys Russ.
Events that we that took place and we had a very very robust.
2018, so there is some shifts going on but I would tell you our cadence. This year is pretty normal to what we historically would do I think the only difference this year that we've experienced as cold weather is a little bit later.
At was last year, but most importantly retailers acted differently. This year than it did last year with trying to break up their black Friday frenzy, and going out a little bit before the of the black call of the Black Friday holiday and putting out deals on I think that impact of this was we saw a bounce back right away.
After the the Black Friday week, and we see some nice results coming in so far.
Okay, and then regarding fourth quarter again, I know there is no guidance, but I want to I guess paraphrase I think what you're at what you've said and make sure. It sounds reasonable you started quarter to date at the range. You said I think mid single digit but it sounds like you do expect that to strength and based on some of the things that you are seeing is at there.
[music].
Well I would tell you, we're not giving guidance for the fourth quarter I think what we've seen so far we recent trends have been very very good but there's still a lot of uncertainty that we can't control. So that whats out of my control I cannot impact, but like I said were locked and loaded recent trends of told us that we're in a good.
Position. So that's about as much color I can put on the fourth quarter for you.
Yeah. That's fair and then this is this is my other follow up and net this also may be unanswerable around 2021, and planning expectations and again, you know, we're not going to get magnitude or how you're thinking about it but if you are planning to grow I assume that the plans to purchase inventory et cetera at need to be in place right in order to.
Lap what did lab is how flexible you can be.
Whenever you finalized what that plan could look like in your business. If that if you are more flexible than non traditional retail or or or little bit less than how you think about that.
Yeah, I would say from a from a product procurement perspective were probably the most flexible retailer in the market.
We have a flexible open to buy and the deal drives our decision so depending on where the deal as we go to it. So we that's this is what we do we do better than anybody in the marketplace I would tell you that that that's what we're built were built for and how were going out how we're going to respond we have holding capacity at our distribution centers of the right deal comes in it's the right margin.
<unk> profile in the REIT desirability, we're going to collapse on it and we'll have it ready to sell to our customers ones right.
Yeah, and I would agree continue that I mean, you know we're excited about next year I mean, there's a lot of uncertainty, but weve proven in these first three quarters. This year that we can operate in this environment effectively and do it very well, we expect there to be.
Even more opportunity on deals on real estate.
And obviously right. We don't know what the consumer is going to do but where they where they've been spending their money and.
Complements of departments, we carry very well, we expect some of that to continue some of those will be trends at continue on we think sales were excited about that.
Okay. Thanks, guys I appreciate it good luck. Thank you.
Thank you. Our next question comes from the line of Rick Nelson with Stephens. Your line is now open.
Hi, Thanks, good afternoon.
Eric talk about kind of the areas of.
The strength of from a merchandise of standpoint can you speak to the categories of God haven't kept pace or at what type of stronger.
Gross.
As of in Q3, Rick the the categories that were weakest for us where the electronics departments.
Which was really impacted by the us exiting the large appliance business, so that was 100% us and our decision of them.
Next department was our clothing department of which was of Annualizing. They at least athletic deal that we had and then that are out of our outdoor outerwear clothing arrived at a little bit later than we would ideally like to habit, which impacted the business than our last two categories, which we had already talked about in August of new that would be a negative.
It was our patio furniture, and our lawn and garden, because we sold all of that during Q2. So those who are low was for performing departments and as we said before three quarters of our departments were all positive. So we those that almost in capital. It's all at all of our negative performing departments for you.
Great.
Thanks for that I'm curious, if you're out of that I mean.
Buyers as we looked at improved 2021.
You know what categories are very low.
Our partnering on personnel at what categories they were at.
Yeah, Rick we do plan on bringing on new merchants to the team next year, we the way we go to market. We don't look for a specific category. We look for some of the culturally fits in the business and could learn the closeout industry that we operate end theres, they're very few fired buyers at even understand the close of market. So there's a lot of training we.
Have to do so.
So I would tell you we will look for the best person available and then we will have them by with their most most capable of buying to move our people around if we have to so we don't we're not looking for specific department per se, we are pretty full and our departments, but we will continue to build like Mark with say the minor leagues will continue at a higher.
Young people out of college and bring them into to get them trained and we'll continue to develop our internal minor league. So they can come up to the big leagues and we were currently doing a very good job at that and we are we're fully staffed and what were going right now.
Great.
Good luck.
Thanks, Rick.
Thank you. Our next question comes from the line of Paul Lejuez with Citi. Your line is now open.
Hey, Thanks, guys I'm curious if the if you look at the fourth quarter, how much of the quarter. Do you think is behind you from sales volume perspective versus what you think you still have in front of you. If you think about you know how prior year's luck.
Just some sort of approximation in terms of what November would typically represent of the of the whole quarter.
Also curious if you.
You can quantify the supply chain pressures cost pressures that you saw in Threeq you. How are you thinking of that and for Q and then I just want to go back to I guess, but you made a comment earlier somebody did about mega deals at rising later I just wanted to understand what that was referring to thanks.
Yeah, Let me take the Mega deal costs at first but I think I created a lot of confusion with that when I talked about it we're getting plenty of large deals each and every day.
We had talked about the Mega deal concept of where there is a larger deal than what we can handle at one time, we'd have to store at than sell it.
Those are deals at our farm few between those that's not the the.
Item that moves our business, that's just a nice one day when you get it.
We were not sure if we're going to see those into next year, but we do believe that there is so much production going on with some of the manufacturing that we're going to see someone produced more than what they are going to be able to sell and that will turn into a mega deal for us. Another piece of the we're excited to see but I don't have visibility of when that's coming how that's coming that's just something we know from our our background at.
Our history that would tell us that someone's going to overproduce trying to keep up with what they're doing right now.
And Paul This is Jamie we're not going to get into the bifurcation of November to the quarter, we just don't get that granular.
And in terms of the supply chain headwinds I mean in the third quarter, we probably had about a 30 basis points I would say 20 to 30 basis points.
You know.
Of impact from those increased rates and the pressure on the wages I mean, it's it's just it is a competitive.
Time at the fees from a labor front, both from a pay standpoint just of velocity in the workload that these guys are doing so there is a there is some turnover there, but the bigger impact really is on the rate on the inbound trucking is one of the inbound import costs and we do expect those to continue into the fourth quarter.
So again, that's why we had talked about a 40% gross margin on a full year basis in the margins of the one area that we are pretty consistent on and we can talk about from a non of guidance standpoint, but from an expectation standpoint, maybe.
And so we expect maybe now to be we're going to shoot for the 40 and work hard to get there, but it's possible that slides of my call at 20 basis points and gets us closer to 39 eight to 40, which is which is actually a little better than what we had guided to initially we started the year end regs includes absorbing that third.
DC in Texas, which we know inherently has some elements to it and Paul let me add a little bit of color on the sales, but obviously, we're not going to quantify the month in November to the overall quarter, but I will tell you where that's a that's a four week month out of our 13 weeks of for the quarter. So theres a lot of business to still be had for the remaining portion of the quarter and our three biggest we.
Sort of still ahead of us so there's a lot of business for us to have and we are locked and loaded ready to go with it.
Got it. Thank you good luck.
Thanks, Paul Thanks, Paul.
Thank you. Our next question comes from the line of Gerry Jeremy Hamblin with Craig Hallum Capital. Your line is now open.
Thanks, Jay one of the first just ask a quick question as we look forward to next year 50.
At least 50, new units can you give us a sense of the Capex needs. You had you obviously you've made some investments in the DC.
The past couple of years, but can you give us kind of a range on what you're thinking on capex with that level of yeah. I mean, we're in the process of rolling that up but typically runs about 2% of revenue and I would expect that to be in that ballpark.
Great and then a lot of revisit the you know the the three biggest weeks that you have remaining in specifically the.
The Ollie's Army week, I'm thinking about the timing on that.
Beginning.
Number 13th.
Is there any risk in having it at that.
At least at because some of your competitors have pulled forward.
Their deals and their black Friday, a you know shopping promotions.
At the consumers, it's kind of spent at or do you like the set up that you know at that point most of the E. Commerce, a shopping is going to be done and you've got a chance to kind of clean up the last you know kind of at the last minute shoppers.
Probably at Jeremy that's how we kind of look at the the strategy of what day, we start when normally Ollie's Army just a day, it's normally ppas positioned intentionally right around this time period. So we don't want to do it too early.
In the season, we do it towards the latter part of the the holiday Inn and the Ollie's Army shopper that knows it and they know they're going to at 25% off all toys at Christmas they they they wait for it and it's a very powerful time period for us its I don't think online shopping or other retailers impacted because they know the pricing is already below the pricing of.
In those stores and to get to 25% off at night, It's a big deal for them. So they normally we'll wait for that to happen.
Great. Thanks for taking the questions guys. Good luck.
Thanks, Jeremy Thank you.
Thank you. Our next question comes from the line of Edward Kelly with Wells Fargo. Your line is now open.
Hi, guys good afternoon.
I wanted to ask you about inventory, we just take a step back and we look at inventory turns turns historically have been pretty low relative to other retailers at.
Does that tell us that sort of like of the Wow deals are responsible for a disproportionate amount of sales and.
Is that the market that we should be.
Sort of focused on I guess I'm asking this question is around the quality of of deals versus quantity of deals and how are you feeling about that aspect of the business today and just hoping you could sort of.
Put that all together for us.
Yeah, I don't think our inventory levels have anything to do with either one of the two I think the inventory levels is our strategic desire to reduce our overall inventory investment in the stores as I said earlier to give the shopper of better shopping experience in the store when you have cartons on top of all your gondolas idle liked at present.
Patient I never had so I would tell you that it's more strategic than anything I think the the Wow factor of our deals is as strong as ever I mean to to do a 43 comp in Q2 of 15 three comp in Q3. When you are built off of long term algorithm of 1% to 2% pretty exciting I would tell you our merchants of done a phenomenal job to excite the consumer.
Or and get them at the box. So at the inventory I would kind of wanting to think that the inventory levels is by any means a lack of availability or lack of quality.
In the box, it's really strategically what we're trying to do our turn is still not going to be anything impressive when I. If we get two or three turned that would be phenomenal. We're not looking to get to a four or five turn where we're kind of where we want to be so for us to get to a threex turn would be exceptional for us at for most of the retailers that's not very impressive at all so we're still of slow.
Low turn business, we're just doing a little bit of fine tuning.
To give us a little bit more opera operational efficiency at the store and hopefully a little better shopping experience for the consumer.
Yeah at and just to add a little bit of color that I mean, I think you know the other thing about the top stuff because you can't sell that inventory when its end of a brown box on top of the shell. So it's important to get that down and have at be sellable to the customer and we've actually the feedback we've gotten from people that walk our stores now when they're little bit lighter is the deals that we have x.
We present themselves much better they do they actually kind of stand out I mean, if mark where he'd probably say, we're still cluttered, maybe not as cluttered as he would like but the deals on those shelves are a little bit cleaner and they stand at a little bit more. So we think it's really a win across all fronts.
Thank you. Our next question comes from the line of Jason Hi, with B. Riley. Your line is now open.
Great. Thanks for taking my question can you talk more about kind of changes hey.
Can you talk more about the changes you're making in your digital marketing strategy I know that your prices are on average much lower than your competition, but it seems like promotions have inc.
Recently been an issue specifically around the holidays, so I wonder.
Maybe you're not getting credit for the value that you're offering consumers and at the Genesis of of changing that digital marketing shut out of your pushing margin digital is two to improve at that.
Hey, Jason is your questions asking if there's more promotions done by others. So because of that we're not getting the credit for our discount.
Yeah, I guess I'm, just I'm, just trying to kind of match of two different things. One is that I know in the past I think we've heard lots of about promotions I know like in Fourq you last year. It was an issue at the toys and now at yen.
We're hearing about promotions from competitors being of central issue.
So and then you're also changing of your marketing strategy. So I'm curious if and I know that your prices are lower than your competitors. We've done the price of trucks. So I'm curious if it's maybe at messaging thing of that yeah, I think that you're just not I'm not getting the message out there that your deals are lower net there maybe it needs to be more more digital rather than just the flyers, but I'm sure.
Most of your thoughts around that.
Yes, Jason that obviously is something that's a possibility we we've been we've been print advertising almost exclusively for our entire lives.
We you know we are starting to like we said walk in test and experiment in the digital World and we do think that that gives us the ability to reach a larger audience and reach an audience that is more of a look alike to our current ollie's army membership through partnerships with Facebook Instagram.
Stitcher ads and whatnot. So we are starting to look at that that's not something we've done.
Very much of in 2020, something we'll start to walk a little bit faster in 2021, but our our head of marketing has a lot of experience in this arena and I think that will help us get our message out to.
Two other folks outside of the army.
Thank you.
Our next question comes from the line of Brian Mcnamara with bearing where capital markets. Your line of sight opener.
Hi, Thank you for taking my question first of all of US I was really impressed as you guys look at Q2 results kind of.
I'm, saying you expected a slow down in the back half I'm curious where that slow down landed relative to your expectations. It seemed like September and October at September in August were very good and even October was pretty good even though you had some self inflicted issues. There and then obviously at a big slowdown in November, but even though the net.
Number is kind of where you guys have been historically, so I'm just I'm just curious relative to your internal expectations kind of how the year at shaped up at least since since your last report. Thank you.
I would say on Q on Q3, Brian we were right on low in line with what we had expected to hit at we we were not disappointed whatsoever. So in theory. If we would have had one more week of that Mailer out in October we would have been probably little bit head of our expectations of what the overall business and I can say with November yeah.
We don't normally in you know we don't normally report intra quarter. So it's a little hard to do that because there's so much business still left that we can make up a heck of a lot of ground. So coming out and is given the real number that we're at is potentially set people at for a disappointment and we may surprise everybody in the.
The next.
Seven eight weeks of business here, so I, it's hard to do this but with so much uncertainty with the pandemic. We can't just expect that things are going to be normal for the rest of the quarter. So the only data point. We have is to give you what we've done so far but I can tell you recent trends.
Very encouraging for us.
I think we're ready to go and were locked and loaded.
And thank you for that I just had a quick follow up this is kind of asked before but I want to dig a little deeper on it in terms of the kind of building out the merchant team. It seems like your your your merchant team is kind of second to non and in my opinion in the space and but it seems like it's kind of small relative at least the senior merchants and you had mentioned.
Kind of a maybe hiring the minor leaguers to put them up into the big leagues I'm just curious.
How much thought has been it's been put towards kind of really growing that's that's seen your merchant team decided at <unk> as you as you build the business for the long term well we end the last Brian I'd say in the last seven eight years, we've really really built at team out compared to where we were before even though where we're at small.
Team I think one thing that differentiates us from most retailers when you buy closeouts.
You don't have as much analysis that takes place like other folks do when you. When you buy every day goods and you do you end up playing ladders and you're planning by size and color and you have a lot more planogram type of buying that takes place.
Our buyers react to what's out there in the marketplace. So you become a general expert in the category.
Your you know your base you know our folks we view them as business people not necessarily a buyer at another retail or just buys the goods and move on to never see the good than ever deal what the.
The pricing of the goods they don't deal with much of at once they buy it our merchants only from the time the rate the purchaser to at least the store. So it's a different model from that perspective, but we continue to invest in it because as we get bigger there is more and more of that we need to do and that we need at helped more help for the merchant team, but we feel like we're well positioned.
Pardon.
We are we're focusing on the senior buyers as well of as we do need to be more in and we will do so and but we're we're currently staffed appropriately.
Thank you best of luck.
Thank you thanks, Brian.
Thank you there are no further questions at this time I would now like to turn the call back over to John Sweeney for closing remarks.
Thank you operator.
Thanks, everyone for your participation and continued support wish you at very happy and safe holiday season of look forward to share in our fourth quarter results with you on our next earnings call.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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