Q2 2021 Ollie's Bargain Outlet Holdings Inc Earnings Call

[music].

Good afternoon, and welcome to Ollie's bargain outlet conference call to discuss financial results for the second quarter of fiscal 2021.

Currently all participants are in a listen only mode later.

We will conduct a question and answer session and instructions will follow at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from ollie's and as a reminder, this call is being recorded on the call today from management are John Swagger, President and Chief Executive Officer.

Jay <unk>, Senior Vice President and Chief Financial Officer, and Eric vendor lock in.

Executive Vice President and Chief operating Officer, I will turn the call over to Jean Fontana Investor Relations to get started please go ahead ma'am.

Good afternoon, a press release covering the company's financial.

We saw positions this afternoon and a copy of that press release can be found in the Investor Relations section on 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 and that actual results could differ materially from those mentioned on today's call.

Any such items, including with respect to our future performance should be considered 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.

That might affect future results may not be in our control and are discussed in our 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 well as our earnings release 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.

Factors that we believe may be important for investors to assess our operating performance reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release and with that I will turn the call over to John.

Yeah.

Thanks, James Hello, everyone. Thank.

Joining our call today.

We are very pleased with our second quarter performance as we were up against the largest volume and most profitable quarter in Ali's history, we delivered an incredible two year comp stack of positive 15, 3% as comparable store sales declined 28% against last year's extraordinary 40.

Three 3% comp store sales increase our team's response through these unprecedented and challenging times remains nothing less than amazing and I am grateful for the collective dedication and hard work that they have truly been truly been the drivers of our success.

First and foremost we are a growth company and one of the most attractive sectors in retail.

Retail extreme value and we believe we have the scale the knowhow and the relationships to benefit from the continued disruption in the marketplace. We have tremendous runway to expand our footprint and we believe the value proposition of our business supports our long term growth plans.

As always we remain laser focused on the execution of our plans.

And confident in our ability to continue to deliver profitable growth.

It all begins all begins with our amazing deals deals that provide incredible values to our customers deal flow remains as strong as ever and we are seeing fantastic offers across all of our categories.

Current environment plays to our strengths.

We see close at opportunities generated in a number of ways ranging from excess inventory overruns canceled orders package changes product innovation and bankruptcies.

We're very excited we're very excited about the quality of closeout still coming our way we have the proven ability to handle deals of any sort.

Size, making us the partner of choice by our vendors.

Dry powder in our open to buy and exceptionally strong liquidity position keeps us ready at all times to capture the remarkable opportunities we see.

As I said before we thrive in times of market disruption.

We continue to expand the <unk> brand to new communities.

<unk> and customers, we opened 12 stores during the quarter and have opened a total of 30 stores this year, including two relocations.

Milestones in the quarter include the opening of our 400 store in the interim to three new States, Vermont, Missouri, and Kansas expanding to a total of 28 states overall the team.

Amazing job executing these projects despite the added challenges of opening and operating during the pandemic.

Due to permitting and construction delays, we now expect to open 46% to 47 new stores this year.

We are excited about the availability of great real estate real estate sites as we continue to build out our store pipeline.

<unk>, which looks strong into next year and beyond our near term target is 50% to 55 store openings per year.

This cadence ensures our ability to maintain the all important knowledge culture in our new stores, a critical component of our success and key element of our consistent profitable unit growth.

Ollie's Army continue.

To be a significant driver of our sales in the quarter and membership keeps growing.

The army increased 11, 2% over the prior year ending the period with a record $12.2 million active members as a result of high retention rate of Ollie's Army members, coupled with a strong growth of new customers.

Members are highly valuable to us as they shop more frequently and spend more money with US. This is demonstrated by the achievement of an 80% sales penetration in the quarter our highest ever.

Growing our members member base is a strategic priority to that end, we continue to refine our marketing programs and redeploy dollars to.

To optimize spend and communicate with our customers and the most relevant way.

Our focus is threefold deepen engagement with our existing customers entice lapsed customers to return and acquire new customers we.

We are testing different strategies for each and we have been pleased with the early reads, so far, particularly with the recent digital initiative.

Examples include customized ads channel testing and card linked offers for new customer acquisition.

We are in the early stages and we'll continue to test learn from our efforts in ramp up. These tactics are most successful dollars most successful dollars best deployed.

Like other retailers we continue.

To see broader industry headwinds, including supply chain challenges labor inflation impacting our business. We are navigating the supply chain issues and currently expect timely deliveries of deliveries of product for the back half of the year.

While we have been successful in hiring in our distribution centers and stores, we are still working diligently to fill positions recognizing.

We are operating in a highly competitive market.

We are also experiencing incremental international and domestic transportation cost, which we are working hard to offset overall, we believe that many of these challenges our challenges are transitory in nature and in the meantime, we will continue to leverage the flexibility of our business model to mitigate these cost pressures.

We have lots of quality product and inventories are in good shape overall, ending up 14, 2% compared to last year that said labor challenges persist, particularly at our distribution centers, which has impact impacted the pace of our throughput importantly, we see this as a temporary issue and we are taking the necessary actions to.

Increased productivity and expect trends to continue to improve.

And Eric <unk>, who joined US in May as executive Vice President and Chief operating Officer, who is overseeing our supply chain on the interim basis, while our search for a new leader continues Eric has deep knowledge and strongest variance in supply chain is and has been immersed.

And our team since joining us he has already identified and implemented opportunities to drive productivity and we are moving the needle in the right direction.

Looking at the third quarter, we continue to come up against our home great numbers from a year ago as we delivered record sales and profits for the third quarter of 2020, driven by comp sales of 15.

15, 3%.

This year, we expect comp sales growth between 5% to 7% on a two year stack basis for the third quarter.

Are there are a lot of uncertainties in the macro environment. We are focused on leveraging our strength to navigate this landscape and capitalized where we can on market disruption we continue to feel very.

Good about our ability to provide great deals to our customers grow our store base and expand Ollie's Army. We will continue to what we do best work as a team stay focused on what we can control and execute our business model.

Looking ahead, our long term growth algorithm remains intact and I'm as bullish as ever about our business.

I want to personally thank our almost 10000 team members for all they are doing to serve our customers and communities and support each other in this challenging environment.

As we say.

We are.

Ollie's.

I'll now hand, the call over to Jay to take you through our financial results.

Thanks, John and good afternoon, everyone I want to start by thanking the entire ollie's team for their incredible teamwork and dedication that made this quarter the success than it was for.

For the quarter net sales totaled $415.9 million or 21, 4% decrease from the prior year comparable store sales decreased 28% in the quarter compared with the prior.

Here year record setting 43, 3% comp increase resulting in a positive 15, 3% two year stack.

In the quarter, we opened 12, new stores ending the period with 409 stores in 28 states in 11, 7% year over year increase in store count.

Since the end of the second quarter, we've opened another seven.

Stores for a total of 30 this year, including two relocations. These stores drive our growth and we are very pleased with their productivity and ROI as our new stores have a payback of less than two years.

Gross profit decreased 21, 2% to $163 million and gross margin increased 10 basis points to 39, 2%.

The increase in margin was due to improvement in merchandise margin, partially offset by deleveraging of supply chain costs, primarily due to higher transportation expenses as expected.

SG&A expenses increased <unk>, 9% to $110.1 million, primarily due to additional selling expenses from our new stores and partially offset by continued.

Tight expense controls throughout the organization.

SG&A as a percentage of net sales increased 590 basis points to 26, 5% as a result of significant deleveraging due to the decrease in sales year over year.

Okay.

Operating income totaled $45.7 million, a 53% decrease from.

The prior year operating margin decreased 640 basis points to 11%.

Adjusted net income, which excludes tax benefits related to stock based compensation decreased 57% to $34 million adjusted.

Adjusted diluted earnings per share decreased 50% to 52.

Adjusted EBITDA.

<unk> 45, 6% to $54.1 million and adjusted EBITDA margin decreased 580 basis points to 13% for the quarter.

Capital expenditures in the quarter totaled $8.2 million, primarily for new and existing stores. This compares with $5.7 million in the prior year.

At.

Decree of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $444 million in cash our proven track record of robust cash flow generation is a testament to the strength of our model, allowing us to fund our growth invest in the business and strategically buy back shares.

Year to date, we have invested almost.

$47 million to repurchase our shares putting our cash to good use and increasing shareholder value.

Due to continued uncertainties, we are continuing our policy of not providing full guidance, but I will share with you some high level thoughts on the remainder of fiscal 'twenty one.

Comp sales comparisons in the third and fourth quarters are challenging as we continued to perform.

Unprecedented levels last year, given the top line benefits from economic stimulus.

As a reminder, our comp store sales growth was 15, 3% in the third quarter last year for the third quarter. This year, we expect comp sales growth of 5% to 7% on a two year stack basis.

We are anticipating continued headwinds in gross margin due to the ongoing.

Supply chain pressures impacting all retailers, including increased transportation and labor costs, we're doing what we can manage and mitigate the higher expenses as these cost pressures have significantly increased in the back half of the year. We are now expecting a revised gross margin rate of approximately 39, 4% to 39, 5%.

For the full year.

Our current plans include the following the opening of 46 to 47 stores, including two relocations with 30 stores under our belt, we feel confident that we can achieve our target, but we are dependent on local permitting and construction timing.

An effective tax rate of 25, 4%, which excludes the tax benefits related to stock.

Compensation and diluted weighted average shares outstanding of approximately $65.8 million before any impacts from future share buybacks.

We will continue to evaluate our plans and respond to the marketplace is necessary. It's the effectiveness of our nimble operating model, our strong financial position and long term growth opportunities that keep us excited for.

Mark Baker I'll now turn the call back to the operator to start the Q&A session operator.

Yes.

As a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key please standby, while we compile the Q&A roster.

Our first.

The fusion comes from Matthew Boss with Jpmorgan you May proceed with your question.

Great. Thanks, So maybe to start on same store sales comps in the second quarter were up 4% relative to 2019, and then your guidance for the third quarter is up 3% to 5% versus 2019. So.

Question, your third quarter guidance unchanged relative to the second quarter at the midpoint.

So John maybe what did you see from comp trends as the second quarter progressed.

And any color on August so far relative to that 3% to 5% comp guide for the third quarter relative to 2019.

So basically yes, Matt let me let me take August 1st we're really not going to commit or comment on it.

Enter quarter right now due to the fact that it's just a little less so it's a little bumpy throughout the quarter and we feel very very comfortable where we're at and where we're going to land for the full quarter basis, but talking talking intra quarter, I announced kind of where we were.

In Q2, it doesn't make a lot of sense because there is definitely some choppiness in the months as we progressed through the stimulus last year and where we're at this year as well. So I think we would tell you we're comfortable where we are guiding to on a relative basis for the numbers.

Very similar to Q.

Q2 numbers obviously.

Q during Q2, there was a lot of stimulus dollars out there.

This year from March April and May.

And those dose dollars, we saw them really slow down in June and July. So we really we saw a slowdown from where we were running in may but we still we're still very very excited to deliver a two.

At 15, 3% and we felt real good where we landed so I think the most important pieces of the inventories are in real good position that deal flow is strong.

We're excited where we are we don't position for Q3.

Great and then maybe just a follow up on gross margin. So you exceeded 2019 gross.

<unk> in both the first and the second quarter I think by about 10 to 20 basis points.

Could you just walk through back half merchandize margin and freight assumptions are.

Basically what's in there to now get to the 39 for full year and any change to 40% gross margin. If we were thinking about next year and beyond.

Yes, Matt This is Jay and I will take that and obviously with these continued headwinds on the supply chain, especially on the transportation front Ray we're seeing big big increases there.

They're not really going to abate anytime soon so we took the full year margin last call. We had talked about being at 39, 7% and 39% for the full year and we've taken.

Now on to the 39, 4% to 39, 5% of your point.

And we did do a great job in the quarter managing the merchandise margins just like we talked about right. We can we can to a large extent work.

Work hard on the buy side work hard on.

Rice changes.

Specially in this inflationary.

In that environment. So that we can have a strong merchandise margin, which is what we did in Q2, we're going to control what we can on the cost side and really then looking at that for the back half I mean thats.

We're obviously going to have an impact on the margins in Q3, and Q4 are we probably have a little bit more pressure in Q3.

<unk>.

Unwind versus Q4, but getting at spreading it back to the 39.4095 for the full year and then to your point for next year certainly.

We do expect just because a lot of these costs in the supply chain they flow with the inventory.

So we do expect that in the first half of next year, we would have increased pressure on.

The gross margin.

We're not obviously, we're not giving guidance necessarily for the back half. So we're not in a position to give specific guidance there, but as we look at next year. We would expect some additional margin pressure certainly in Q1 and to some extent to Q2 as well.

Best of luck.

Thanks.

Thanks, Matt.

Thank you. Our next question comes from Kate Mcshane with Goldman Sachs. You May proceed with your question.

Hi, thank.

Thank you so much for <unk>.

Our question.

I guess with regard to inventory you were very detailed in your prepared.

Are you you still are having a relatively.

Decent time, obtaining inventory despite some of the supply chain challenges could you maybe talk a little bit more about your strategy there to ensure that you're still getting inventory into your stores.

Sure I think I think one important thing is that I think there is a misconception potentially out there in the market places there's no shortage of closeout deals in the marketplace today.

Our merchants are doing a great job.

Getting product on the marketplace and we really are seeing a lot of a lot of flow in every category.

<unk> that we buy in each everyday so there is definitely not an issue with the merchandise side of the business.

Supply chain has definitely been a challenge for all of us.

We are I think fortunate that we're not a huge importer.

Just a lot of other folks are that have created a lot more headaches for them, but we have our fair share of headaches, but nothing that.

A lot of other folks are seeing.

I think we're in pretty good shape to get the goods into the building and out to the stores. We have a handful of stores that I would tell you today, we're not overly pleased with where we're at but we're working very diligently to take care of that but the majority of our stores are in very very good shape.

We're dealing with those exceptions at this point in time.

Thank you.

Thank you.

Thank you. Our next question comes from Simeon Gutman with.

Morgan Stanley You May proceed with your question.

Hey, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.

First I wanted to I wanted to follow up Hey, Yeah, Hey.

I wanted to follow up on Matts question on the sales.

Looking at your two year geometric stacks, they're running in that 3% to 4% range in the last the last two years basically kind of in line with your long term algo, the 1% to 2% comp and this is occurring through arguably the most of the transformational or unexpectedly disruptive.

<unk> period that we may see in some time. So I guess my question is how are you viewing this outcome and I think some may look at this and say you had this incredible up with last year, but it doesn't seem like you're necessarily holding onto all of that business. You picked up so I'm just I'm curious how you respond to that is of any concern, especially given that the issue you mentioned the pipeline closeout.

Closeout pipeline is that needs to be very strong.

Yes, yes, Michael I think the main takeaway is last year was an unprecedented unprecedented year is something that we can't duplicate.

Included in our numbers from last year or about 700 basis points of PPE, that's not selling.

This year so we.

We're doing a much better when you Peel out the PPE and the the I'll call. It the frenzy buying for people from a COVID-19 perspective. So it's not fair just to look at a a 4% comp or a 3% to 5% comp that would not be the right way to look at I think we've done a phenomenal job holding onto the new customer.

Customers that we have that we were able to attract during the COVID-19 period all of our data tells us we're doing better at having them repeat as a customer than we had in the past.

So I would I would venture to if we peel off the onion, a little bit more with backing out PPE it'd probably be a little bit more more impressed with our overall results.

Results.

From last year and this year. So I think we're excited where we're sitting and I think we're in great shape.

Okay that is helpful and my follow up on SG&A. If we look at your SG&A rate relative to Q2, 2019 did delever by a little bit and you've shown a great track record.

Record over the years of leveraging that SG&A line.

Over time, so I guess is the labor piece is that really the key kind of changed relative to what we've seen over time and if any other call outs and how we should be thinking about that line moving forward and maybe a more normalized comp environment. Thank you.

Yes sure.

Good question, Yes, you are right I mean, we did delever, a little bit compared to 19, and I would say that has driven.

Primarily on the labor side obviously.

Compared to last year with the wild swings in sales.

And then delever.

But that SG&A rate for the quarter.

Right in line.

What we were expecting and we really think of it on a full year basis.

And we've talked about kind of on a on an annual basis and SG&A target of saying in the 25% range.

And I think that holds true for this year as well generally of course, that's dependent on sales, but as we've said in the.

It's very competitive for store hiring in and for us at the stores, we kind of adjust market by market.

By store, we're not going to do something where we're going to take minimum wage up across the board that would be very impactful but.

We have addressed that so far this year market by market, where we've needed to put a little bit of pressure.

On our payer.

Market when our wages there.

But again on a full year basis, we're going to continue to manage to that and I would estimate and kind of a normalized basis at 25% SG&A rate on an annual basis has a decent target.

Okay. Thank you very much.

Thank you. Our next question comes from Randy Connick with Jefferies. You May proceed with your question.

Hey, Thanks, a lot guys.

Go back to the stimulus impact and things like that have you been able to kind of think about parsing that out and thinking about how much of that.

Fact of the business.

With normalized run rate run rate.

Great.

Going forward and when you look at the.

Second when you look at the spending patterns of the Ollie's Army.

How did the how did they change their spending in terms of transactional velocity versus ticket in terms of impacting.

The comps in the quarter.

Sure Randy let me take the first one with regards to stimulus and the impacts on the sales I got to tell you that's probably one of the toughest.

Items for us to Peel off and figure out so theres been so much noise in the last 18 months with with other retailers being closed the reopening.

The opening of other retailers the timing of stimulus payments with Tim is payment one two and three so.

We have not been successful with trying to Peel. It off I think the main takeaway from our perspective would be our long term algo on the comp of 1% to 2% is 100% intact and we feel very comfortable with it and I think right now we're performing a little bit ahead of that so.

We'll see where we go with it but that's how I would try to look at the business.

We're a growth story side always focus on the new store growth and then the comps will be secondary from our perspective.

But I think thats, how we look at the business from my perspective.

With regards to the Ollie's Army the Ollie's Army as we said in the script there.

They are still accounting for that now reached a record 80% of our over overall sales penetration, which I feel is phenomenal and we've done a great job on our conversions to the army from the new customers and retain our existing an army base, but in terms of the overall visits. The army has remained very very consistent they are actually slightly up over.

Over last year in terms of their frequency.

And their spend a little bit down over last year, just because of lack of PPE, but they're outpacing the non ollie's army members a little bit more than they had in the past. We've always said they outpace of about 40% more in sales on a per transaction basis or closer to $42.43 right now.

Okay.

Got it one last one.

You made the point about your competitor the other retailers that have a lot of import are seeing a lot of more issues around added costs to their supply chain et cetera. So when you look at.

Your supply chain, that's what the cost, but the actual processing time to stay in the warehouses.

It houses, let's say those are down a little bit when do you expect that to kind of normalize out in terms of forgetting that forget the cost more about being able to process, we need to process on a normalized basis.

Going forward when does that kind of occur.

Yes, I think I think right now Randy I would tell you. We're we've made a lot of progress in the.

The last eight weeks and we're on a pretty good pace to get things pretty much where we want them to be but I would tell you we would think.

On a conservative basis, we should be right on track by the end of Q3.

Perfect. Thanks, guys.

Thanks Randy.

Thank you. Our next question comes from Brad Thomas with Keybanc. You May proceed with your question.

Hi, Thanks for taking my question.

I was curious if you could talk John a little bit about.

How you all are looking at pricing in this backdrop, where youre getting inflationary pressures.

Quick.

Clearly your competitors that you comp again.

Are pushing through some higher prices can you talk about what you all are doing and your flexibility to do that perhaps quicker and areas, where youre seeing more inflation.

Yes, Brad we are at this point, we're no different than any other retailer in terms.

<unk> costs cost pressures all around the board. So what we're doing is we're doing our best to keep the value proposition intact, because that's our entire model, but our merchants are in a lot of the competitors stores each and every day to see where the pricing is going and where we can make the adjustments that theyre, making where we're making the appropriate adjustments.

To keep the value there, but get a little more for our product than we were previously would offset some of these cost and they are working tirelessly to do this and we're actually expanding the merch margin to offset some of these supply chain cost and we I don't think we'll be able to do it all this year, but we will get much closer than most people can do because we do have the ability to buy backwards.

Work into the margin and push a bit harder on the vendors in order to get the the margin profile, we're looking for what the pricing we're getting.

And John can you talk a little bit more about the quality of inventory you have today and I think it was very well anticipated that sales were going to slow against such record numbers last year.

But how do you feel about the quality of the inventory and the need for markdowns going forward.

I would tell you.

Brad I feel very very comfortable with the quality of our merchandise in.

Our merchants were just in Las Vegas, this past week, and ASD and they had a very very successful show I think much.

More successful than we anticipated so the deal flow for us on the closeout World is very positive the quality of the merchandise is phenomenal.

In terms of markdown risk or anything to clear anything we.

We're in great shape I would tell you we have no fears with regards to what we're hearing that it's not going to sell I think.

The merchants have bought the right product in the store and everything looks pretty fresh and looks good and is priced properly. So I think we're in real good shape on the markdown front in the merch margin front.

And if I could squeeze a quick one on how to think about holiday I know, it's a long way out and you're not giving explicit guidance, but is there anything that youre seeing right now from a.

Trend standpoint in terms of what's selling what's not to give you any more confidence about how you all might be able to tell this holiday season.

No I don't think obviously were not trend centers were trend followers, but there's not really anything out there that I think we get our hands on that that's a.

The spinner deal or anything like that but I can see.

Today, but I would tell you we think we're well positioned.

The toy front toys is a big part of our business in the fourth quarter.

Our seasonal holiday will be better than ever I think we've made great strides in making changes there were a part of the product which is much more relevant for the consumer today and I think overall.

Or all the gift, giving front, we're well positioned this year as well so I think I think from my perspective.

We should have a pretty good successful holiday period, barring any unforeseen things.

Covid starting to rear its head up again, and the viruses to starting to impact people and how people are reacting. So we just got to watch that.

But from our perspective from a merchandise front, we're in real good shape.

Great. Thank you John.

Thanks, Greg.

Thank you. Our next question comes from Peter Keith with Piper Sandler You May proceed with your question.

Thanks, everyone.

I guess I had a question.

I think you guys did the script said that Eric.

On the call.

Regardless.

Sure.

Okay. So you've been at the company three months I guess, it's usually a pretty good time periods to assess.

Changes you can make or initiatives you can implement so Erik I guess I'd be.

Curious anything you see as an opportunity coming in with a fresh set of eyes on Ali's to make some positive change.

Sure I appreciate the question Peter I was trying to blend into the pain here, but thanks for calling me out.

Been a great experience onboarding with the company.

As you said I've been here a little over three.

I've enjoyed meeting some very smart and talented people.

At Ollie's, who are just so committed to the mission I know coming in.

Just the reflection I was super impressed with how all of these has been able to retain its strong entrepreneur.

Spirit.

His remain committed.

To make a product the absolute hero of the store experience, even while it continues to grow at this fast pace. So.

That's been Super impressive and this team has certainly been incredibly resilient.

Through an unprecedented time, so I'm proud to be part of the story.

The answer your question I have been.

Very focused.

Three months ply chain discipline since I started.

Certainly had experience with this macro does very challenging macro environment.

That we're in in my in my prior life and came into a very similar environment.

Here and what I'm seeing is is that.

And this is focusing the team on continuous improvement.

And process improvement and improvements in productivity because.

Labor is such a huge challenge both the supply of labor and the expense related to labor and wage rates.

That we've been able to.

Move very very fast as a team we have a great team here in supply chain, we've been able to move very fast as a team to make improvements.

In some process change and in various ways to get more productivity and more throughput capacity.

Without it having to be hiring.

People to do it if that makes sense Peter.

Yes, It does I guess maybe.

Provide some specific examples I guess that would help us seem to understand that better.

Sure Yeah, I'll give you couple of examples.

We're making numerous improvements probably some of that.

The larger ones.

We've consolidated.

Our deliveries to stores.

Which was probably the single biggest improvement we've made when I first after I first started where most stores, we're getting two or even three deliveries a week now most stores are getting one delivery weeks, that's a significant enhancement in.

Productivity throughput and a reduction in transportation expense.

Another is were making some changes to our warehouse management system, some modifications to automate some process.

And probably the last highlight of significance is we're making investments in material handling equipment, specifically in our Georgia facility too.

And enhance its productivity.

Okay, great. Thanks, so much for the feedback and good luck guys.

Sure. Thanks Peter.

Thank you. Our next question comes from Edward Kelly with Wells Fargo. You May proceed with your question.

Yeah, Hi, guys good afternoon.

I wanted to ask you about.

The sales line your sales this quarter were up 25% to 2019.

Which was below the street and I think because at least the way it looks in the model right anyway, because new store productivity.

Just kind of curious as to.

What you.

Thoughts are on that is that where some of the throughput stuff is and then.

How do we think about that in Q3 I mean, it does look like your geometric stack in Q3 is going to be similar so we'll want to twenty-five be better.

In Q3 or do those challenges remain I was just kind of curious as to what's going on.

There.

Yeah. This is Jay and I think really.

We saw that consensus estimate to we're not sure. How you guys built that model up from our standpoint.

Well, maybe it was the new store productivity issue on the model side I mean, we are right in line with our expectations, our new stores are actually running a little bit ahead of our.

Patients, but that said right I mean.

Trying to care prepared <unk> to this year I mean, obviously, the new stores that we opened last year, just like our comps were very productive because of the stimulus that was in the marketplace.

And certainly that was the case during Q2, so what we.

Because of the big.

Swing from 'twenty to 'twenty, one I mean, our new store productivity or our plan on kind of a base model was very different than it would normally be probably in the 55% to 60% range where it is normally.

<unk> <unk> call. It 90, so we're not sure that you guys took that into account in the model.

Other impact that could be.

Coming out is we have had little bit of shift in timing and opening our stores.

In the quarter and that that's going to continue in the back half we're going to get these stores open, but we are especially in the back half experiencing.

A number of weeks of delays in those openings. So I think the driver.

River for Q2 was really.

However, you guys model the new store productivity. It was a disconnect of maybe didn't take it back down to normalized levels. I think you had one big one big takeaway or one big thing for you to make sure Youre clear on is the inventory or the throughput had absolutely nothing to do with any sales deficiency.

<unk> on the new stores, the new stores performed very well and even like Jay said, they probably performed a little bit ahead of our plan.

The inventory in the stores was very high quality and very strong so the inventory at new stores that have had zero negative impact on the performance of those guidance.

<unk>. Thank.

Thank you. Our next question comes from Paul <unk> with Citi. You May proceed with your question.

Hey, everyone. The spreadsheet them on for Paul Thanks for taking our question. Thank.

Thank you mentioned.

There were a handful of stores that you all were disappointed with are working on I was just wondering if we could dig into is.

Is there anything unique about <unk>.

Geographically or.

<unk>.

Similar vintage in.

Any additional color on what might.

It might be able to remedy that.

Yes, I wouldn't say disappointed at all I think what I said was we had a handful of stores that were a little lighter on inventory than we'd like to.

At this point in time, so the performance of the stores are all very strong. So I don't want anyone to read that the wrong way, we have some opportunities to get a little more inventory in those boxes to make them look a little bit better, but it's like I said, it's a handful it's not that it's the 10% rule per se.

Where we see the stores that so.

So.

Those stores are performing just fine I would like to see them performed better, but I got a little more inventory into them, but that's that's a very small part of our overall company everything else is in real good shape.

And those stores are those stores predominantly located down in the south.

Okay.

And then on the markets, where you have.

See them your wages.

Is there been any change some states of.

Rolled off some incremental unemployment benefits just any additional information on that.

With some of the states that have rolled off the roll off the unemployment early has made hiring easier for sure we saw big.

<unk> change in those states that did that it made a lot a lot easier to hire at the states that have not done that yet still have definitely a larger challenge to hire people in that but thats coming up thats right around the corner here September.

Got it thanks and good luck.

Thank you.

Thank you our next question.

<unk> comes from Rick Nelson with Stephens You May proceed with your question.

Thanks.

Question.

The outlets army of them.

How that works.

And your thoughts.

There's some of that.

Last year some.

Multiple.

What are you thinking for this year.

Yes, Rick with regards to I'll talk about the holiday Mailer, which we used to call the buzzard Mailer.

The last year, we had changed the Ollie's Army night to be a week long event because of the.

Issues with Covid and not knowing the landscape when we had to go out to print.

We still have time to make that final decision on how we're going to proceed this year for the holiday Mailer.

My inclination today is that we're going to go back to one night.

Not.

Event only on that Sunday in December so that's what we're planning today, but were watching everything that we're going to we have till October to make this decision. So once we once we get a little more information we will make hopefully the best decision for our stores and for our customers, but tend to have been leaning to go back.

Back to a one day event on a Sunday or May event, which we had was just fine everything work right for that so we're excited about it.

For that the bootcamp Mailer and we were very pleased with the results there.

Counter to that trend.

All right.

Curious about the imports.

Yep.

As a percent of sales.

Where you see that going over the longer term.

Yes, Rick this is Jay and the good news for US is that we are not a big importer generally, especially compared to some other retailers I mean for us, it's probably about 14 to 16.

10 of our of our annual purchases.

Now, we can have some peaks and valleys in that related to seasonal product.

But that's that's where it's at it's not a huge percentage.

Eric and the team are working hard to get the.

Work through the bottlenecks in the supply chain and get those goods are delivered.

And I would say from my perspective, we don't have plans ideally we don't want to increase that number closeouts are our primary focus but.

We will augment where needed as we continue to grow.

Thank you.

Good luck.

Thanks, Rick.

Thank you our next.

<unk> personal is from Jeremy Hamblin with Craig Hallum. You May proceed with your question.

Thanks, So it sounds like at a high level, you're returning to your long term growth algorithm. Both in terms of unit performance.

In terms of margins for the most part in line minus.

There's some supply chain costs, and then maybe a little bit on labor, although that sounds like that should return to a normalized level I wanted to focus on the unit openings 46 to 47, a little bit lower than you were thinking back in may.

And in terms of thinking about the color around that and why.

Question.

Total unit growth is going to be a little bit three four units shorter.

With fewer than what you had been thinking before could you add a little color into that and then.

Thinking about that moving forward.

<unk> talked about 50, maybe up to 55 units.

The year is there any change on that part of.

All of these growth story.

Sure Jeremy the first one is the easiest.

The overall, 50% to 55 is fully intact and that's our plan going forward.

With regards to this year.

<unk> 46 to 47 really has become.

Units.

Necessary.

Strictly due to the fact that permit delays in construction delays, we have 50 sign leases. They just can't be delivered in time.

So theres nothing Earth shattering, what they were going to roll those into next year.

So I would.

Adventure to say, what we will do north of 50 next year in south.

South of 55, but we won't be less than $50 my expectation for next year. So the the size of the leases are all signed ready to go we can get the permits pulled in times with the construction delays as well the construction out there is getting tough as well with product availability. So we feel we feel good with Orlando.

Understood as a quick follow up to that in terms.

Becomes of looking ahead to next year of 50% to 55% would you.

Percentage of those would you expect to be in infill markets.

<unk> new markets.

Mike My guess is right now we have.

Termed the leases that we're working on today for 2022 were in.

About 19 states of our 28, so I don't I think we might have one new state next year that we're looking to go into.

And that will be continue to backfill in our existing markets.

Obviously, some of our new markets, we call Kansas.

<unk>, Missouri, Texas those are all still new markets that we're going to work very hard to fill into so I would tell you probably 60% new markets, 40% backfill.

Got it.

Thank you best wishes.

Thanks, Jeremy.

Thank.

Next question comes from Anthony <unk> with loop capital markets. You May proceed with your question.

Good afternoon, and thanks for taking my question.

Obviously, you had a very difficult comparison and Thats why your comps were down like you said they were up 15% a two year stack basis.

Talked a little bit about 700 basis points headwind from.

Our net PP&E sales last year. When I was just wondering if you had any commentary in terms of.

Yes.

What were your better performing categories I guess on a relative basis and then just any anything you can say about traffic versus ticket. Thank you.

Yeah, Anthony I'll take the.

The performance categorically in terms of the better performing versus the it obviously was a tough quarter gone up and up to 43%.

Comp, but in terms of our better categories.

Candy was probably our shining light that was out there are seasonal category.

Very small luggage department that we have in clothing.

And bear in mind I think.

Last year with this economic stimulus, we had broad strength across all the departments.

So even some of the departments that were looking at for this quarter that are down still performed very well.

But yes, you can't.

Can't match at 43, 3% comp from a year ago.

And in regards to.

Transactions versus average basket, we don't have traffic counters, so we measure transactions and for our comp of negative 28% about 80% of that came from the transaction side and 20% of that was from a.

A decrease in the average basket and the average basket was really driven by a decrease in the average retail.

That's very helpful. Thanks, and good luck for the remainder of the year.

Thanks Anthony.

Thank you. Our next question comes from Brian Mcnamara with Baron capital markets.

You May proceed with your question.

Thanks for taking the question so inventories appear pretty lean across retail kind of record price realization.

I was wondering if you could give a bit more color on where exactly you are your excess supply that you're acquiring is coming from.

Brian I would venture to tell you that our exit supplies coming from all of our vendors, where we're not having any issues in any category.

So it's very broad based it's we deal with over 200 vendors.

So I would tell you that I can't pinpoint any specific category that were not getting product.

So our existing relations.

Relations relationships plus our new relationships are we're getting all of our product, but categorically our merchants are buying to their open to buys and therefore, they're doing a great job getting the products that they need to meet our sales. So we're not seeing any shortfall of product out there in the market. There is there is a lot of closeouts that are flowing in the marketplace.

And we're feeling good where we're sitting.

Got it and then I guess as a follow up to that another closeout retail executives. This morning, basically stated that retail in general could see kind of negative comps next year. As this year is kind of one time benefits and as supply chain pressures ease we could see an increase in the flow of merchandise.

<unk> in the country at the same time these comps turned negative I am curious if one you would generally agree with that assessment and two it seems like that would really benefit in terms of supply has that played out.

Yes, Brian I would I would not necessarily agree that next year would be a negative comp per retail model.

For all these at.

And to think that the disruption in the marketplace.

As it plays out it's going to benefit us from a product flow perspective, So I think a lot of the pain people, maybe 1 billion. This year with canceled orders challenges moving product in there could be an abundance of closeouts that may rollout next year. So I would tell you that this plays into our.

Our our hand potentially as a benefit not a detriment without any doubt in my mind.

Great. Thanks, a lot best of luck.

Thanks, Brian.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to John <unk> for any further remarks.

Marks.

Thank you operator.

Thanks to everyone for your participation and continued support we look forward to sharing our third quarter results with you on our next earnings call.

Okay.

Okay.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

[music].

[music].

Good afternoon, and welcome to Ollie's bargain outlet conference call to discuss financial results for the second quarter of fiscal 2021.

Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.

Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from ollie's and as a reminder, this call is being recorded on the call today from management are John Swygert, President and Chief Executive Officer, Jason <unk>, Senior Vice President and Chief Financial Officer and.

Eric vendor walk exec.

Executive Vice President and Chief operating Officer, I will turn the call over to Jean Fontana Investor Relations to get started please go ahead ma'am.

Good afternoon, a press release covering the company's financial results was issued this afternoon and a copy of that press release can be found in the Investor Relations section.

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 and that actual results could differ materially from those mentioned on today's call any such items, including with respect to our future performance should be considered.

On the but 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 future results may not be in our control and are discussed in our 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 well as our earnings release 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 that we believe may be important for investors to assess our operating performance reconciliation.

And of the most closely comparable GAAP financial measures to the guidance non-GAAP financial measures are included in our earnings release and with that I'll turn the call over to John.

Okay.

Thanks, Jean and Hello, everyone. Thank you for joining our call today.

We are very pleased with our second quarter performance as.

Lease against the largest volume and most profitable quarter in Ali's history, we delivered an incredible two year comp stack of positive 15, 3% as comparable store sales declined 28% against last year's extraordinary 43, 3% comp store sales increase our team's response through these unprecedented.

We were up and in challenging times remains nothing less than amazing and I am grateful for the collective dedication and hard work that they have truly been truly been the drivers of our success.

First and foremost we are a growth company and one of the most attractive sectors in retail extreme value and we believe we have the scale the knowhow and the relation.

Relationships to benefit from the continued disruption in the marketplace, we have tremendous runway to expand our footprint and we believe the value proposition of our business supports our long term growth plans.

As always we remain laser focused on the execution of our plans and confident in our ability to continue to deliver profitable growth.

That.

It all begins all begins with our amazing deals deals that provide incredible values to our customers deal flow remains as strong as ever and we are seeing fantastic offers across all of our categories.

Current environment plays to our strengths, we see close opportunities generated a number of ways ranging from.

Excess inventory overruns canceled orders package changes product innovation and bankruptcies.

We're very excited we're very excited about the quality of closeout still coming our way we have the proven ability to handle deals of any size, making us the partner of choice by our vendors.

Dry powder.

And our open to buy and exceptionally strong liquidity position keeps us ready at all times to capture the remarkable opportunities we see.

As I said before we thrive in times of market disruption.

We continue to expand the <unk> brand to new communities and customers. We opened 12 stores during the quarter and have opened a total.

Total of 30 stores this year, including two relocations.

Milestones in the quarter include the opening of our 400 store in the interim to three new States, Vermont, Missouri, and Kansas expanding to a total of 28 states.

Overall, the team has done an amazing job executing these projects despite the added challenges.

Of opening and operating during the pandemic.

Due to permitting and construction delays, we now expect to open 46 to 47 new stores this year.

We are excited about the availability of great real estate real estate sites as we continue to build out our store pipeline, which looks strong into next year and beyond our near term.

Term target is 50% to 55 store openings per year.

This cadence ensures our ability to maintain the all important knowledge culture in our new stores, a critical component of our success and key element of our consistent profitable unit growth.

Ollie's Army continue to be a significant driver of our sales in the quarter and membership keeps growing.

The army increased 11, 2% over the prior year ending the period with a record $12.2 million active members as a result of high retention rate of Ollie's Army members, coupled with a strong growth of new customers.

Members are highly valuable to us and they shop more frequently and spend more money with us.

This is demonstrated by the achievement of an 80% sales penetration in the quarter our highest ever.

Growing our members member base is a strategic priority to that end, we continue to refine our marketing programs and redeploy dollars to optimize spend and communicate with our customers and the most relevant way our focus.

<unk> is threefold deepen engagement with our existing customers entice lapsed customers to return and acquire new customers.

We're testing different strategies for each and we have been pleased with the early reads, so far, particularly with the recent digital initiatives.

Examples include customized ads channel testing and.

Bank offers for new customer acquisition.

We are in the early stages and we'll continue to test learn from our efforts in ramp up. These tactics are most successful dollars. Most successful dollars are best deployed.

Like other retailers, we continue to see broader industry headwinds, including supply chain challenges labor in inflation.

In card marketing our business.

We are navigating the supply chain issues and currently expect timely deliveries of deliveries of product for the back half of the year.

While we have been successful in hiring in our distribution centers and stores. We are still working diligently to fill positions recognizing we are operating in a highly competitive market.

We are also experiencing.

Incremental international and domestic transportation cost, which we are working hard to offset overall, we believe that many of these challenges our challenges are transitory in nature and in the meantime, we will continue to leverage the flexibility of our business model to mitigate these cost pressures.

We have lots of quality product and inventories are in good.

<unk> overall, ending up 14, 2% compared to last year that said labor challenges persist, particularly at our distribution centers, which has impact impacted the pace of our throughput importantly, we see this as a temporary issue and we are taking the necessary actions to increase productivity and expect trends to continue to improve.

Proof.

And Eric <unk>, who joined US in May as executive Vice President and Chief operating officer is overseeing our supply chain on an interim basis, while our search for a new leader continues Eric.

Eric has deep knowledge and strongest variance in supply chain is and has been immersed in our team since joining us.

He has already.

<unk> identified and implemented opportunities to drive productivity and we are moving the needle in the right direction.

Looking at the third quarter, we continue to come up against our home great numbers from a year ago as we delivered record sales and profits for the third quarter of 2020, driven by comp sales of 15, 3%.

This year we.

We expect comp sales growth between 5% to 7% on a two year stack basis for the third quarter.

While there are a lot of uncertainties in the macro environment. We are focused on leveraging our strengths to navigate this landscape and capitalize where we can on market disruption. We continue to feel very good about our ability to provide great deals to our customers.

Grow our store base and expand Ollie's Army, we will continue to what we do best work as a team stay focused on what we can control and execute our business model.

Looking ahead, our long term growth algorithm remains intact and I'm as bullish as ever about our business.

I want to personally thank our almost 10.

<unk> thousand team members for all they are doing to serve our customers and communities and support each other in this challenging environment.

As we say.

We are.

Ollie's.

I will now hand, the call over to Jay to take you through our financial results.

Thanks, John and good afternoon, everyone.

I want to start by thanking the entire ollie's team for their incredible teamwork and dedication that made this quarter the success than it was.

For the quarter net sales totaled $415.9 million or 21, 4% decrease from the prior year comparable store sales decreased 28% in the quarter compared with the prior year record setting 43 three.

3% comp increase resulting in a positive 15, 3% two year stack.

In the quarter, we opened 12, new stores ending the period with 409 stores in 28 states in 11, 7% year over year increase in store count.

Since the end of the second quarter, we've opened another seven stores for a total of 30 this year, including <unk>.

Two relocations these stores drive our growth and we are very pleased with their productivity and ROI as our new stores have a payback of less than two years.

Gross profit decreased 21, 2% to $163 million and gross margin increased 10 basis points to 39, 2%.

The increase in margin was due to improvement in merchant.

Nice margin, partially offset by deleveraging of supply chain costs, primarily due to higher transportation expenses as expected.

SG&A expenses increased <unk>, 9% to $110.1 million, primarily due to additional selling expenses from our new stores and partially offset by continued tight expense controls throughout the organization.

<unk>.

SG&A as a percentage of net sales increased 590 basis points to 26, 5% as a result of significant deleveraging due to the decrease in sales year over year.

Operating income totaled $45.7 million, a 53% decrease from the prior year operating margin decreased 640.

40 basis points to 11%.

Adjusted net income, which excludes tax benefits related to stock based compensation decreased 57% to $34 million.

Adjusted diluted earnings per share decreased 50% to 52.

Adjusted EBITDA decreased 45, 6% to $54.

$1 million and adjusted EBITDA margin decreased 580 basis points to 13% for the quarter.

Capital expenditures in the quarter totaled $8.2 million, primarily for new and existing stores. This compares with $5.7 million in the prior year.

At the end of the period, we had no outstanding borrowings under.

Our $100 million revolving credit facility and $444 million in cash our proven track record of robust cash flow generation is a testament to the strength of our model, allowing us to fund our growth invest in the business and strategically buy back shares.

Year to date, we have invested almost $47 million to repurchase our shares putting our cash.

Cash to good use and increasing shareholder value.

Due to continued uncertainties, we are continuing our policy of not providing full guidance, but I will share with you some high level thoughts on the remainder of fiscal 'twenty one.

Comp sales comparisons in the third and fourth quarters are challenging as we continued to perform at unprecedented levels last year given the top line.

Benefits from economic stimulus.

As a reminder, our comp store sales growth was 15, 3% in the third quarter last year for the third quarter of this year, we expect comp sales growth of 5% to 7% on a two year stack basis. We are anticipating continued headwinds in gross margin due to the ongoing supply chain pressures impacting all retailers.

Including increased transportation and labor costs, we are doing what we can and manage and mitigate the higher expenses as these cost pressures have significantly increased in the back half of the year. We are now expecting a revised gross margin rate of approximately 39, 4% to 39, 5% for the full year.

Our current plans.

Include the following the opening of 46 to 47 stores, including two relocations with 30 stores under our belt, we feel confident that we can achieve our target, but we are dependent on local permitting and construction timing.

An effective tax rate of 25, 4%, which excludes the tax benefits related to stock based compensation and diluted weighted average.

Shares outstanding of approximately $65.8 million before any impacts from future share buybacks.

We will continue to evaluate our plans and respond to the marketplace is necessary. It's the effectiveness of our nimble operating model, our strong financial position and long term growth opportunities that keep us excited for the future ill now turn the call back to the operator.

To start the Q&A session operator.

Thank you.

Binder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key please standby, while we compile the Q&A roster.

Our first question comes from Matthew Boss with Jpmorgan you May proceed.

Proceed with your question.

Great. Thanks, so much.

Maybe to start on same store sales comps in the second quarter were up 4% relative to 2019, and then your guidance for the third quarter is up 3% to 5% versus 2019, so basically third quarter guidance unchanged relative.

To the second quarter at the midpoint.

So John maybe what did you see from comp trends as the second quarter progressed.

And any color on August so far relative to that 3% to 5% comp guide for the third quarter relative to 2019.

Yes, Matt let me let me.

Take August 1st we're really not going to commit or comment on inter quarter right now due to the fact that it's just a little less so it's a little bumpy throughout the quarter and we feel very very comfortable where we're at and where we're going to land for the full quarter basis, but talk and talk and intra quarter I announced kind of where we were in Q2 it doesn't.

It makes a lot of sense because there is definitely some choppiness in the months as we progressed through the stimulus last year and where we're at this year as well. So I think we would tell you we're comfortable where we are guiding to on a relative basis for the the numbers.

And very similar to Q to Q2 numbers obviously.

Obviously.

Q during Q2, there was a lot of stimulus dollars out there.

This year from March April and May.

And those dose dollars, we saw them really slow down in June and July. So we really we saw a slowdown from where we were running in may but we still very we're still very very excited to deliver a two year stack of $15.

3%.

We felt real good where we landed so I think the most important pieces of the inventories are in real good position that deal flow is strong.

And we're excited where we are we don't position for Q3.

Great and then maybe just a follow up on gross margin. So you exceeded 2019 gross margin in both.

First in the second quarter, I think by about 10 to 20 basis points could.

Could you just walk through back half merchandise margin and freight assumptions are.

Basically what's in there to now get to the 39 for full year and any change to 40% gross margin. If we were thinking about next year and beyond.

Yes, Matt this is Jay and I'll take that and obviously with these continued headwinds on the supply chain, especially on the transportation front Ray we're seeing big big increases there.

They're not really going to abate anytime soon so we took the full year margin last call. We had talked about being at 39, 7% and 39% for the full year and we've taken.

That now on to the 39, 4% to 39 five year point.

And we did do a great job in the quarter managing the merchandize margin just like we talked about right. We can we can to a large extent work.

Work hard on the buy side work hard on.

Nice changes.

Specially in this inflationary.

<unk> environment. So that we can have a strong merchandise margin, which is what we did in Q2, we're going to control what we can on the cost side and really then looking at that for the back half I mean thats.

We're obviously going to have an impact on the margins in Q3, and Q4 are we probably have a little bit more pressure in Q3.

<unk>.

Unwind versus Q4, but getting at spreading and back to the 39, 4% and 39 five for the full year and then to your point for next year certainly.

We do expect just because a lot of these costs on the supply chain may flow with the inventory and so we do expect that in the first half of next year, we would have increased pressure on.

Margin.

But we're not obviously, we're not giving guidance necessarily for the back half. So we're not in a position to give specific guidance there, but as we look at next year. We would expect some additional margin pressure certainly in Q1 and to some extent in Q2 as well.

Best of luck.

Thanks.

The growth map.

Thank you. Our next question comes from Kate Mcshane with Goldman Sachs. You May proceed with your question.

Hi, thank.

Thank you so much for.

Taking a question.

I guess with regard to inventory.

<unk> in your prepared comments.

Thank God.

You still are having a relatively.

Decent time, obtaining inventory despite some of the supply chain challenges could you maybe talk a little bit more about your strategy there to ensure that.

Youre still getting inventory into your stores.

Sure I think I think one important thing is that I think there is a misconception potentially out there in the marketplaces. There is no shortage of closeout deals in the marketplace today.

Our merchants are doing a great job.

Getting product on the marketplace and we really are seeing a lot of a lot of flow in every category.

Should we buy in each everyday so there is definitely not an issue with the merchandise side of the business.

Supply chain has definitely been a challenge for all of us.

We are I think fortunate that we are not a huge importer.

Just a lot of other folks are that have created a lot more headaches for them, but we have our fair share of headaches, but nothing.

<unk> the folks youre seeing.

I think we're in pretty good shape to get the goods into the building and out to the stores. We have a handful of stores that I would tell you today, we're not overly pleased with where we're at but we're working very diligently to take care of that but the majority of our stores are in very very good shape and we're dealing with those exceptions at this point in time.

Part of it.

Thank you.

Thank you.

Yes.

Thank you. Our next question comes from Simeon Gutman with.

Morgan Stanley You May proceed with your question.

Hey, guys. This is Michael Kessler on for Simeon. Thank you for taking my questions.

First I wanted to I wanted.

Hey, I wanted to follow up on Matt's question on the sales.

Looking at your two year geometrics that theyre running in that 3% to 4% range in the last the last two years basically kind of in line with your long term, although the 1% to 2% comp and this is occurring through arguably the most of that transformational.

Following the disruptive period that we may see in some time. So I guess my question is how are you viewing this outcome and I think some may look at this and say you had this incredible uplift last year, but it doesn't seem like you are necessarily holding onto all of that business. You picked up so I'm just I'm curious how you would respond to that is of any concern, especially given that the SUV.

On the pipeline closeout pipeline is that needs to be very strong.

Yes, yes, Michael I think the main takeaway is last year was an unprecedented unprecedented year, it's something that we can't duplicate.

Included in our numbers from last year or about 700 basis points of.

Many that's not selling this year so.

We're doing a much better when you Peel out the PPE and the.

The I'll call it the frenzy buying for people from a COVID-19 perspective, so it's not fair just to look at a 4% comp of 3% to 5% comp that would not be the right way to look at I think we've done a phenomenal job.

People holding on to the new customers that we have that we were able to attract during the COVID-19 period all of our data tells us we're doing better at having them repeat as a customer than we had in the past.

So I would I would I would venture to if we peel the onion, a little bit more with backing out PPE, probably be a little bit more.

More impressed with our overall results.

From last year and this year. So I think we're excited where we are sitting in I think we're in great shape.

Okay that is helpful and for my follow up on SG&A. If we look at your SG&A rate relative to Q2 2019.

The debt delever by a little bit and you've shown.

A great track record over the years of leveraging that SG&A line.

Over time, so I guess is the labor piece is that really the the key kind of change relative to what we've seen over time and if any other call outs and how we should be thinking about that line moving forward and maybe a more normalized comp environment.

Yeah.

Yeah sure. That's a good question, yes, you are right I mean, we did delever, a little bit compared to 19, and I would say that has driven.

Primarily on the labor side obviously.

Compared to last year with the wild swings in sales, we expect them to Delever.

But that SG&A rate for the quarter.

Right in line.

What we were expecting and we really think of it on a full year basis.

And we've talked about kind of on a on an annual basis and SG&A target of saying in the 25% range.

And I think that holds true for this year as well generally of course, that's dependent on sales, but as we've said the.

The market is very competitive for store hiring in and for us at the stores, we kind of adjust market by market.

Store by store, we're not going to do something where we're going to take minimum wage up across the board that would be very impactful, but we.

We have addressed that so far this year market by market, where we needed to put a little bit of pressure on our payroll.

Payroll and our wages there.

But again on a full year basis, we're going to continue to manage to that and I would estimate and kind of a normalized basis at 25% SG&A rate on an annual basis has a decent target.

Okay. Thank you very much.

Thank you. Our next question comes from Randy <unk> with Jefferies. You May proceed with your question.

Hey, Thanks, a lot guys.

Go back to the stimulus impact and things like that have you been able to kind of think about parsing that out and thinking about how much of that.

<unk> of the business.

With normalized run rate run rate.

Great.

Forward and when you look at the.

Second when you look at the spending patterns of the Ollie's Army.

How did the how did they change their spending in terms of transactional velocity versus ticket in terms of impacting.

The comps in the quarter.

Sure Randy let me take the first one with regards to the stimulus and the impacts on the sales I got to tell you that's probably one of the toughest.

Items for us to Peel off and figure out so theres been so much noise in the last 18 months with with other retailers being closed the reopening.

Opening of other retailers the timing of the stimulus payments with Tim is paying one two and three so.

We have not been successful we're trying to peel that off I think the main takeaway from our perspective would be our long term algo on the comp of 1% to 2% is 100% intact and we feel very comfortable with it and I think right now we are performing a little bit ahead of that so.

We'll see where we go with it but that's that's how I would try to look at the business.

We're a growth story side always focus on the new store growth and then the comps will be secondary from our perspective.

But I think thats, how we look at the business from my perspective.

With regards to the the Ollie's Army the Ollie's Army as we've said in the script there.

They are still accounting for <unk> now reached a record 80% of our over overall sales penetration, which I feel is phenomenal we have done a great job on our conversions to the army from the new customers and retain our existing an army base, but in terms of the overall visits. The army has remained very very consistent they are actually slightly up overall.

Over last year in terms of their frequency.

And their spend a little bit down over last year. This was the lack of PPE, but they're outpacing the non dollars I remember as a little bit more than they had in the past we have always said they outpace of about 40% more in sales on a per transaction basis or closer to $42.43 right now.

Okay.

Got it one last one.

You made the point about your competitive other retailers that had a lot of import.

I've seen a lot of more issues around added costs to their supply chain et cetera.

Look at.

Your supply chain Thats, what the cost, but the actual processing times seen the warehouses.

Houses, let's say those are down a little bit when do you expect that to kind of normalize out in terms of forget not forget the costs more about being able to process, we need to process on a normalized basis.

Going forward when does that kind of occur.

Yes, I think I think right now Randy I would tell you. We're we've made a lot of progress in the <unk>.

Eight weeks and we're on a pretty good pace to get things pretty much where we want them to be but I would tell you we would think.

On a conservative basis, we should be.

Right on track by the end of Q3.

Perfect. Thanks, guys.

Thanks Randy.

Thank you. Our next question comes from Brad Thomas with Keybanc. You May proceed with your question.

Hi, Thanks for taking my question.

I was curious if you could talk John a little bit about.

How you all are looking at pricing in this backdrop, where youre getting inflationary pressures.

Click.

Clearly your competitors that you comp against.

Are pushing through some higher prices can you talk about what you all are doing and your flexibility to do that perhaps quicker and areas, where you are seeing more inflation.

Yes, Brad we are at this point, we're no different than any other retailer in terms.

Of having cost cost pressures all around the board. So what we're doing is we're doing our best to keep the value proposition intact, because that's our entire model, but our merchants are in and a lot of the competitor stores each and every day to see where their pricing is going and where we can make the adjustments that theyre, making where we're making the appropriate adjustments.

To keep the value there, but get a little more for a product than we were previously would offset some of these costs and they're working tirelessly to do this and we're actually expanding the merch margin to offset some of these supply chain cost and we I don't think we'll be able to do it all this year, but we will get much closer than most people can do because we do have the ability to buy backwards.

Work into the margin and push a bit harder on the vendors in order to get the margin profile, we're looking for what the pricing we're getting.

And John can you talk a little bit more about the quality of inventory you have today I mean, I think it was very well anticipated that sales were going to slow against such record numbers last year.

But how do you feel about the quality of the inventory and the need for markdowns going forward.

I would tell you.

Brad I feel very very comfortable with the quality of our merchandise.

Our merchants were just in Las Vegas, this past week, and ASD and they had a very very successful show I think much.

More successful than we anticipated so the deal flow for us on the closeout World is very positive the quality of the merchandise is phenomenal in.

In terms of markdown risk or anything to clear anything we are in great shape I would tell you we have no fears with regards to what we're carrying that's not going to sell I think.

The merchants have bought the right product in the store and everything looks pretty fresh and looks good and is priced properly. So I think were were enrolled good shape on the markdown front in the merch margin front.

And if I could squeeze a quick one on how to think about holiday I know, it's a long way out and you're not giving explicit guidance, but is there anything that youre seeing right now from a trend.

Trend standpoint in terms of what's selling what's not to give you any more confidence about how you all might be able to tell this holiday season.

No I don't think obviously were not trendsetters were trend followers, but there's not really anything out there that I think we're to get our hands on that that's a.

The spinner deal or anything like that but I can see.

Today, but I would tell you we think we're well positioned.

The toy front toys is a big part of our business in the fourth quarter I think our seasonal holiday will be better than ever I think we've made great strides in making changes there where our product was much more relevant for the consumer today and I think overall.

Overall, the gift, giving front, we're well positioned this year as well so I think I think from my perspective.

We should have a pretty good successful holiday period, barring any unforeseen things.

Covid starting to rear its head up again, and the viruses to starting to impact people and how people are reacting. So we just got to watch that.

But from our perspective from a merchandise front, where we're in real good shape.

Great. Thank you John.

Thanks, Brett.

Thank you. Our next question comes from Peter Keith with Piper Sandler You May proceed with your question.

Thanks, everyone.

I guess I had a question I.

I think you guys did the script said that Eric.

<unk> is on the call.

Regardless.

Thank you Sir.

Okay. So you've been at the company three months I guess thats, usually a pretty good time periods to assess.

Changes you can make or initiatives you can implement so Erik I guess I'd be.

Curious anything you see as an opportunity coming in with a fresh set of eyes on Ali's to make some positive change.

Sure I appreciate the question Peter I was trying to blend into the pain here, but thanks for calling me out.

Been a great experience onboarding with the company.

As you said I've been here a little over three.

Three months.

Meeting, some very smart and talented people.

At Ollie's, who are just so committed to the mission.

Coming in.

Just a reflection I was super impressed with how all of these has been able to retain its strong entrepreneur entrepreneurial spirit.

We remain committed.

Profit product the absolute hero of the store experience, even while it continues to grow at this fast pace.

So that's been Super impressive and this team has certainly been incredibly resilient.

Through an unprecedented times I'm proud to be part of the story.

Answer your question Ive been <unk>.

<unk> focused.

To make imply chain discipline since I started.

Certainly had experience with this macro does very challenging macro environment.

In my in my prior life and came into a very similar environment here.

And.

What I'm seeing is is that.

In.

Focusing the team on continuous improvement.

And process improvement and improvements in productivity because.

Labor is such a huge challenge both the supply of labor and the expense related to labor and wage rates.

We've been able to.

Very very fast as a team we have a great team here and supply chain will be able to move very fast as a team to make improvements.

In some process change and in various ways to get more productivity and more throughput capacity.

Without it having to be hiring.

Move people to do it if that makes sense Peter.

Yes, It does I guess maybe.

Right.

Some specific examples I guess that that would help us to understand it better.

Sure Yeah, I'll give you couple of examples.

We're making numerous improvements probably some of that.

More of the larger ones.

We've consolidated.

<unk> deliveries to stores.

Which was probably the single biggest improvement we've made when I first after I first started where most stores, we're getting two or even three deliveries a week now most stores are getting one delivery, we've said a significant enhancement in.

So the activity throughput and a reduction in transportation expense.

Another is were making some changes to our warehouse management system, some modifications to automate some process.

Probably the last highlight of significance is we're making investments in material handling equipment, specifically in our Georgia facility too.

For enhanced its productivity.

Okay, great. Thanks, so much for the feedback and good luck guys.

Sure. Thanks Peter.

Thank you. Our next question comes from Edward Kelly with Wells Fargo. You May proceed with your question.

Yes, hi, guys good afternoon.

I wanted to ask you.

Hi.

The sales line.

Sales this quarter up 25% to 2019.

Which was below the street and I think because at least the way it looks in our model right anyway, because new store productivity.

Just kind of curious as to.

About <unk> on that is that where some of the throughput stuff is and then how do we think about that in Q3 I mean, it does look like your geometric stack in Q3 is going to be similar so will what the 25 to be better.

In Q3 or do those challenges remain I was just kind of curious as to what's going.

What you thought.

Yeah. This is Jay and I think really.

We saw that consensus estimate to we're not sure. How you guys built that model up from our standpoint.

Maybe it was a new store productivity issue on the model side I mean, we are right in line.

With our expectations, our new stores are actually running a little bit ahead.

On the expectations, but that said right I mean.

China care prepared <unk> to this year I mean, obviously, the new stores that we opened last year, just like our comps were very productive because of the stimulus that was in the marketplace and.

And certainly that was the case during Q2, so what we.

And because of the.

<unk> from 'twenty to 'twenty, one I mean, our new store productivity or our plan on kind of a base model was.

Very different than it would normally be probably in the 55% to 60% range, where it is normally low.

<unk> <unk> call. It 90, so we're not sure that you guys took that into account in the model the other impact that could.

Big coming out is we have had little bit of shift in timing and opening our stores.

In the quarter and that that's going to continue in the back half we're going to get these stores open, but we are especially in the back half experiencing.

A number of weeks of delays in those openings. So I think the.

Driver for Q2 was really however.

However, you guys model the new store productivity. It was a disconnect and maybe didn't take it back down to normalized levels. I think you had one big one big takeaway of one big thing for you to make sure Youre clear on is the inventory or the throughput had absolutely nothing to do with any sales.

Efficiency on the new stores, the new stores performed very well and even like Jay said, they probably performed a little bit ahead of our plan.

The inventory in the stores was very high quality and very strong so the inventory at new stores that have had zero negative impact on the performance of those guidance.

Thank you. Our next question comes from Paul <unk> with Citi. You May proceed with your question.

Hey, everyone. This branch you I'm on for Paul Thanks for taking our question I think you mentioned the ROE.

A handful of stores that you all were disappointed with are working on I was just wondering if we could dig.

Is there anything unique about <unk>.

Geographically or.

Sure.

Similar vintage in.

Any additional color on what might.

It might be able to remedy that.

Yes, I wouldn't say disappointed at all I think what I said was we had a handful of stores that were a little lighter on inventory than we'd.

We'd like to see them at this point in time so.

The performance of the stores are all very strong so I don't want anyone to read that the wrong way, we have some opportunities to get a little more inventory in those boxes to make them look a little bit better, but it's like I said, it's a handful it's not though.

The 10% rule per se.

Where we see the stores.

Is that so.

Those stores are performing just fine I'd like to see them perform a little bit better by getting a little more inventory end of them, but that's that's a very small part of our overall company everything else is in real good shape.

And those stores are those stores predominantly located down in the south.

Okay.

And then on the markets where.

Where you have adjusted your wages.

Birmingham change since states of.

Rolled off some incremental unemployment benefits just any additional information on that.

With some of the states that have rolled off the robot. The unemployment early has made hiring easier for sure we saw.

A big change in those states that did that and made it a lot easier to hire at the states that have not done that yet still have definitely.

A larger challenge to hire people in that but thats coming up thats right around the corner here September.

Got it thanks and good luck.

Thank you.

Thank you our.

Our next question comes from Rick Nelson with Stephens You May proceed with your question.

Okay.

Thanks.

Sure.

Question.

The outlets Army.

Uh huh.

And your thoughts.

There's a number of them.

Last year.

Multiple.

What are you thinking for this year.

Yes, Rick with regards to I'll talk about the holiday Mailer, which we used to call the buzzard Mailer.

Last year, we had changed the Ollie's Army night to be a week long event because of the.

Issues with Covid and not knowing the landscape when we had to go out to print.

We still have time to make that final decision on how we're going to proceed this year for the holiday Mailer.

But my inclination today is that we're going to go back to one night.

100.

One night event only on that Sunday in December So that's what we're planning today, but were watching everything that we're going to have toll.

October to make this decision. So once we once we get a little more information, we will make hopefully the best decision for our stores and for our customers.

But tinder was leaning to.

To go back to a one day event on a Sunday Army.

Hey event, which we had was just fine everything worked great for that so we're excited about it.

For that the bootcamp Mailer and we were very pleased with the results there.

Cancer current so that term.

Curious about the import.

Because.

Some of the sales.

Where you see that going over the longer term.

Yes, Rick this is Jay and the good news for US is that we are not a big importer generally, especially compared to some other retailers I mean for us, it's probably about 14 to 16.

16% of our of our annual purchases.

Now, we can have some peaks and valleys in that related to seasonal product.

But that's that's where it's at it's not a huge percentage.

Eric and the team are working hard to get.

Work through the bottlenecks in the supply chain and get those goods are delivered.

And I would say from my perspective, we don't have plans ideally, we don't want to increase that number closeouts our primary focus but.

We will augment where needed as we continue to grow.

Thank you.

Good luck.

Thanks, Rick.

Thank you our next.

Question comes from Jeremy Hamblin with Craig Hallum. You May proceed with your question.

Thanks, So it sounds like at a high level, you're returning to your long term growth algorithm. Both in terms of unit performance.

In terms of margins for the most part in line minus.

Some supply chain costs, and then maybe a little bit on labor, although that sounds like that should return to a normalized level I wanted to focus on the unit openings 46 to 47, a little bit lower than you were thinking back in may.

And in terms of thinking about the color around that and why.

Hi.

With total unit growth is going to be a little bit.

Three or four units shorter.

Fewer than what you had been thinking before could you add a little color into that and then.

Thinking about that moving forward.

I have talked about 50, maybe up to 55 units.

Units in a year is there any change on that part of.

All of these growth story.

Sure Jeremy the first one is the easiest.

The overall $50 to 55 is fully intact and that's our plan going forward.

With regards to this year.

<unk> 46 to 47 really has become.

Become necessary.

Strictly due to the fact the permit delays in construction delays, we have 50 sign leases. They just can't be delivered in time.

So there is nothing earth shattering what they were going to roll those into next year.

So I would.

Adventure to say, what we will do north of 50 next year in south.

South of 55, but we won't be less than 50 as my expectation for next year. So the the size of the leases are all signed ready to go we can get the permits pulled in times with the construction delays as well the construction out there is getting tough as well with product availability. So we feel we feel good of Orlando.

Understood as a quick follow up to that in term.

Terms of looking ahead to next year, 50% to 55% would you.

What percentage of those would you expect to be in infill markets.

Versus new markets.

Mike My guess is right now we have.

The leases that we're working on today for 2022 were in.

About 19 states of our 28, so I don't I think we might have one new state next year that we're looking to go into a lot of it.

And that will be continuing to backfill in existing markets.

Obviously, some of our new markets, we call Kansas.

Missouri, Texas. Those are also new markets that we're going to work very hard to fill into so I would tell you probably 60% new markets, 40% backfill.

Got it.

Thank you.

Yes.

Thanks, Jeremy.

Thank.

Our next question comes from Anthony <unk> with loop capital markets. You May proceed with your question.

Good afternoon, Thanks for taking my question.

Obviously, you had a very difficult comparison, and Thats, where comps were down like I said, they were up 15% up to your stack basis.

You talked a little bit about 700 basis points headwind from.

PP&E sales last year was just wondering if you had any commentary in terms of.

What were your better performing categories I guess on a relative basis and then just any anything you can say about traffic versus ticket. Thank you.

Yeah, Anthony I'll take the.

The performance categorically in terms of the better performing versus the.

Obviously, it was a tough quarter going up and up to 43%.

Comp, but in terms of our better categories.

Candy was probably our shining light that was out there are seasonal category.

Very small luggage department that we have in clothing.

And bear in mind I think.

Last year with this economic stimulus, we had broad strength across all the departments.

So even some of the departments that were looking at for this quarter that are down still performed very well.

But yes, it's you cannot.

Can't match at 43, 3% comp from a year ago.

And in regards to.

Transactions versus average basket, we don't have traffic counters, so we measure transactions in for art.

Comp of negative, 28% about 80% of that came from the transaction side and 20% of that was.

From a.

The decrease in the average basket and the average basket was really driven by.

A decrease in the average retail.

That's very helpful. Thanks, and good luck with the remainder of the year.

Thanks Anthony.

Thank you. Our next question comes from Brian Mcnamara with Baron capital market.

You May proceed with your question.

Thanks for taking the question so inventories appear pretty lean across retail what kind of record price realization.

I was wondering if you could give a bit more color on where exactly you are your excess supply that you're acquiring is coming from.

Brian.

Venture to tell you that our excess supply is coming from all of our vendors, where we're not having any issues in any category.

So it's very broad based it's we deal with over 200 vendors.

Tell you that I can't pinpoint any specific category that were not getting product. So.

So our existing relations.

Relationships relationships plus our new relationships are we're getting all of our product, but categorically our merchants are buying to their open to buys and their full they're doing a great job getting the products they need to meet our sales. So we're not seeing any shortfall of product out there in the market. There is there is a lot of closeouts that are flowing in the marketplace.

And we're feeling good where we're sitting.

Got it and then I guess as a follow up to that another closeout retail executives. This morning, basically stated that retail in general could see kind of negative comps next year. As this year is kind of one time benefits and as supply chain pressures ease we could see an increase in the flow of merchandise.

The country at the same time these comps turned negative I'm curious if one you would generally agree with that assessment and two it seems like that would really benefit ollie's in terms of supply if that played out thanks.

Yeah.

Brian I would I would not necessarily agree that next year would be a negative comp per retail.

Model for all these at.

And to think that the disruption in the marketplace.

As it plays out is going to benefit us from a product flow perspective, So I think a lot of the pain people may be filling in this year with canceled orders challenges moving product in there could be an abundance of closeouts that may rollout next year. So I would tell you that this plays into our.

Lisa or hand, potentially as a benefit not a detriment without any doubt in my mind.

Great. Thanks, a lot best of luck.

Thanks, Brian.

Thank you and I'm not showing any further questions. At this time I would now like to turn the call back over to John Swygert for any further remarks.

Thank you operator.

Thanks to everyone for your participation and continued support we look forward to sharing our third quarter results with you on our next earnings call.

Okay.

Okay.

Okay.

Thank you. This concludes today's conference call. Thank you for participating you may now disconnect.