Q3 2021 Ollie's Bargain Outlet Holdings Inc Earnings Call
Yes.
Good afternoon, and welcome to all of these bargain outlet conference call to discuss financial results for the third 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 today's call from management, we have John Swygert, President and Chief Executive Officer, Jason <unk>, Senior Vice President and Chief Financial Officer, and Eric Vandal Bloch Executive Vice President and Chief operating.
Sir I will now turn the call over to Jean Fontana.
Investor Relations at I C or to get started please go ahead ma'am.
Thank you good afternoon, and welcome to <unk> third quarter Conference call. The 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 of the company's website I'd like to remind everyone that management's remarks on this call may contain forward looking statements, including but not limited to predictions expectations or estimates.
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 speak only as of today and we undertake no obligation to update or revise them for any new information or future events.
Cause that might affect future results may not be in our control and I'll discuss our SEC filings and encourage you to review these filings, including our annual report on Form 10-K quarterly reports on Form 10-Q, as well as our earnings release issued earlier today.
Description of these factors will be referring to certain non-GAAP financial measures on today's call that you believe maybe for investors to assess our operating performance reconciliation of the most closely comparable GAAP financial measure to this non-GAAP financial measures are included in our earnings.
With that I'll turn the call over to John.
Thanks Gene and whoever won thank you for joining our call today.
While this was a very challenging and difficult quarter, we remain bullish on the long term opportunities ahead of us looking.
Looking back on the third quarter sales and operating performance was primarily impacted by greater than expected supply chain related headwinds leading to results below our expectations. These headwinds included shipping delays are important seasonal product into our supply chain network, which in turn created backlogs in our distribution centers, causing delays in shipping the right product to the stores in a timely fashion.
<unk>.
We also believe that the sudden rise in inflation had an outsized impact on a portion of our customers who mostly live on fixed income.
Well I'm extremely proud of our team's efforts through these challenging times, we were unable to overcome these headwinds during the quarter.
For the third quarter comparable store sales decreased 15, 5% compared to a 15, 3% increase last year.
Compared to 2019, our comparable store sales decreased one 3%.
While we are disappointed with these results we remain as confident as ever in our business model and believe that many of the factors impacting US right now are transitory in nature.
So let me discuss with let me discuss what opportunities. We see first we remain very excited about the incredible deals being presented to us each and every day and we expect to see even more deals related to order cancellations and abandoned goods associated with important shipping delays second we have made meaningful progress in driving improved efficiencies and increased throughput across our distributions.
Centers and third we provide exceptional value to our customers, which we believe will benefit our business is highly inflationary period continues and consumers trade down.
Now, let me address and let me address each of these opportunities in more detail beginning with the supply chain.
During the third quarter, we were impacted by later than expected deliveries in certain categories, including our key seasonal offerings, such as toys Christmas and heaters. This was due to some supply chain challenges related to the reduced availability of shipping containers capacity constraints and port congestion.
Moving forward, we expect to see incremental deals from delayed shipments that are canceled or abandon and available at this at this disruption as this disruption is what we are designed to capitalize on.
We see closeout opportunities generated a number of ways ranging from excess inventory overruns cancel orders package changes product innovation and bankruptcies.
There are any inflationary times, we see companies take measures to offset higher costs, such as resizing of packages, which also creates great deal opportunities for us I stated at the beginning of Covid that market disruption creates opportunities and deal flow for ollie's. The current environment plays into our strengths and we are pleased that we continue to see exciting opportunities.
Second while we have made great progress in driving increased throughput in our distribution centers it took longer than anticipated to return to optimal levels with all supply chain with all the supply chain challenges in the marketplace.
The delays in receipts of our imports led to timing issues for our Dcs forced us to push out some of our closeout deals to make room for the imports that were late arriving in addition, the low visibility into the timing of deliveries made it difficult to include our best deals and advertise fliers. Therefore, our flyers did not reflect certain items that typically drive excitement.
Our stores.
In our distribution centers, we implemented changes to our processes as well as leadership and saw significant improvements throughout.
As in throughput as the quarter progressed, despite the supply chain challenges. We were pleased to have achieved vastly improved throughput levels by the end of the quarter.
Our Pennsylvania, Georgia distribution centers are operating that desired throughput levels to meet our needs. Although we still have more work to do on our newer Texas DC.
<unk>, we're very close to hitting our throughput goals, while human capital remains a challenge we have worked to improve our hiring process as well as made investments in our workforce to attract and retain quality associates. We are pleased to share with you. We are pleased to share. We have made the decision to expand our Pennsylvania distribution center by 200000 square.
Our feet, enabling us to service approximately 50 additional stores for a total of 200 to 210 stores.
We ended the quarter with inventory up 19% compared to last year. This increase was in part due to heavier receipts near the end of the quarter and in transit import product.
We are pleased with both the current quantity and quality of our inventory in most of our stores. Today. However, there are still opportunities in stores, which are serviced by our Texas DC as I spoke to previously.
In addition to supply chain related headwinds, we believe that inflation in food gas services and other necessities as creating financial pressure on our lower income customer base, reducing their discretionary dollars.
Since a portion of our customers army fixed income and need to stretch their dollars. Further we believe this is having an outsized impact on our business as customers are allocating a higher percentage of their income to fuel and grocery expenses with.
With that said, we have historically seen that our extreme value offerings appeal to a broader base of consumers in periods of economic uncertainty, which we believe creates opportunity for us to capture new customers longer term. In addition, we will opportunistically raise prices, while maintaining our strong value proposition.
Ollie's Army continue to be a key driver of our sales in the quarter. The army increased almost 10% over the prior year and in the period with $12 5 million active members. Once again, we saw nearly 80% of our sales penetration in the quarter matching last year's historical high.
Sorry last quarter's historical high one of our biggest event of the year Ollie's Army Night is Sunday December 12, and we are excited once again to open our doors exclusively to Ollie's Army members for an evening of shopping and special discounts our stores will be packed with toys and seasonal product. In addition to our other great deals and our teams are eager.
To welcome our most loyal bargain nuts.
If you are an ollie's army member, we hope to see you there if not there is still time to enlist in the army now and join us for a great night of deals and excitement.
In terms of marketing, we continue to evolve our marketing strategy to incorporate a digital component to attract new customers enhance our brand awareness, while maintain our connection with our most loyal customers. We plan to increase our marketing spend next year to increase brand awareness as we continue to expand our store base.
Turning to real estate during the third quarter, we opened 18 stores, including our first in Illinois, The fourth new state we entered this year we.
We have opened 45, new stores year to date, bringing us to a current total of 430 stores in 29 states with one additional opening planned for later in January.
While new stores have likely been impacted by the same dynamics as our current store base. We remain pleased with the productivity level of our new stores overall.
New stores are ultimately the engine of our sales growth and we plan to open between $50 to 55 stores annually on a go forward basis and believe that our model can support 1050 stores in total.
While the supply chain issues are likely impacting us in the short term, we remain as confident as ever in our business model and our long term growth outlook.
Quarter to date comparable store sales trends are down low single digits compared to 2019.
While we have received more of our seasonal products during the fourth quarter. It arrived later than expected caused us to miss out on the early holiday selling season.
Based on this we expect comparable store sales to be down 2% to flat compared to fourth quarter of 2019.
As we look past 2021, we are confident that we will continue to grow well into the future with the significant white space in front of us and deliver strong growth in both our top and bottom lines as we have for almost 40 years.
Reflecting confidence in our business. We are pleased to announce the board has authorized an additional $200 million share repurchase program.
In summary, we are a high growth company and one of the most attractive sectors in 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 model supports our long term growth plans.
And finally I want to thank our over 10000 team members for all they do to serve our customers and communities and support each other during these challenging times.
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 wanted to start by thanking the entire ollie's team for their incredible teamwork and dedication throughout the quarter.
For the quarter net sales totaled $393 5 million or seven 5% decrease from the prior year comparable store sales decreased 15, 5% in the quarter compared with the prior year.
Comparable store sales compared to 2019 declined one 3%.
In the quarter, we opened 18, new stores ending the period with 426 stores in 29 states at 10, 6% year over year increase in store count.
Since the end of the third quarter, we've opened another four stores for a total of 45% this year, including two relocations and one additional plan to opening in late January.
These stores drive our growth and we're very pleased with their productivity and cash on cash returns as our new stores continue to pay for themselves in less than two years.
Gross profit decreased 11% to $153 million and gross.
Margin decreased 160 basis points to 39, 8% compared to a very strong 41, 4% in <unk>.
Same period a year ago.
The decline in margin was due to higher supply chain costs, primarily important and trucking costs and to a lesser extent higher wage rates in D C, which more than offset the 120 basis point increase in merchandise margin year over year.
SG&A expenses increased seven 8% to $114 million, primarily due to additional selling expenses from our new stores, excluding a $300000 gain on an insurance settlement in the quarter SG&A as a percentage of net sales increased 430 basis points to 29, 8% as a result of deleveraging.
Due to the decrease in sales.
We continue to operate with tight expense controls throughout the organization.
Adjusted operating income, which excludes the insurance settlement gain totaled $29 9 million or 48, 3% decrease from the prior year adjusted operating margin decreased 610 basis points to seven 8%.
Adjusted net income, which excludes the insurance gain and tax benefits related to stock based compensation was $22 million and adjusted diluted earnings per share was <unk> 34.
Adjusted EBITDA was $37 $9 million and adjusted EBITDA margin decreased 590 basis points to nine 9% for the quarter.
Capital expenditures in the third quarter totaled $11 $9 million, primarily for new and existing stores. This compares with $7 $8 million in the prior year.
At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $229 $7 million in cash.
Proven track record of robust cash flow generation and a testament to the strength of our model, allowing us to fund our growth and strategically invest in share buybacks.
During the quarter, we repurchased $165 million worth of our shares under our prior share repurchase program, bringing our year to date share repurchases to $200 million as you saw in our earnings release, our board of director has a board of directors has authorized an additional $200 million share repurchase.
Program, reflecting our continued commitment to returning value to our shareholders.
I will share some high level thoughts on the remainder of fiscal 'twenty one comp.
Comp sales comparisons in the fourth quarter are challenging as we continue to perform at unprecedented levels last year, given the meaningful topline benefit from economic stimulus later in the quarter and.
In addition, the headwinds we saw impact our third quarter results are expected to continue in <unk>.
Quarter to date comps are tracking down low single digits versus the same period in 2019, we expect comp store sales for the quarter to be down 2% to flat as compared to 19.
For the full year, we expect sales to be between $1 76 to one $772 billion.
We are anticipating continued headwinds in gross margin due to the ongoing supply chain pressures impacting all retailers, including increased import and trucking costs as well as continued higher labor costs. While we are doing what we can to manage and mitigate these higher costs. We anticipating additional gross margin pressure and are now expecting gross margin to be between 38 six.
Percent and 38, 8% for the year.
This decrease from the prior guidance is due to 45% higher than expected inbound transportation costs.
Storage <unk>, our opportunistic approach to procuring import transportation has worked well for us.
This strategy relies heavily on non vessel operators in the spot market in this unprecedented environment. This structure has been a disadvantage in securing capacity and resulted in higher costs.
For the full year, we expect EPS of $2 30 to $2 35.
While we're not providing guidance for fiscal 'twenty, two and we will provide more details on our fourth quarter call. We thought it might be helpful to provide some context around what we expect to see.
First we will continue to expand our footprint and plan to open 50 to 53 stores for the full year in terms of comp store sales, we anticipate the first half of the year to be more challenging given tough compares we.
We expect comps to stabilize in the back half of the year.
We expect gross margin pressures to be elevated in the first half of 'twenty, two particularly in the first quarter for which we expect gross margin to be between 34, 5% to 35, 5%.
This reflects continued pressure from increased inbound transportation costs as well as the recognition of these costs capitalized as a component of inventory.
Going forward, we have expanded the number of <unk>, we work with to secure capacity and are working directly with ocean carriers.
To contract space for fiscal 'twenty two.
<unk> found our growth story to be attractive and we are looking forward to securing long term partnerships. Our merchandize margins are well within our historical ranges and we expect that to continue as we restructure our shipping contracts as they expire and we expect gross margin to return to our historical levels starting in the back half of fiscal 'twenty two.
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 always keeps us excited for the future.
I'll now turn the call back to the operator to start the Q&A session operator.
Certainly ladies and gentlemen, if you have a question at this time. Please press Star then one on you touched on telephone. If your question has been answered and you'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Matthew Boss from Jpmorgan. Your question. Please.
Great. Thanks.
So maybe John just to start out if we think about.
Third quarter comps down one 3% relative to 2019 relative to the 3.2 in the second quarter if.
If we think about that 4% to 500 basis points sequential deceleration how much would you tie to the supply chain.
Your level of visibility for the remainder of the fourth quarter and then just what provides confidence that 1% to 2% is still the long term comp algorithm.
Sure, Matt I would tell you where my confidence comes in is that we've really worked very hard to get the dcs aligned to get the throughput of the Dcs that.
The levels that we need them to be at and we feel very confident that as we said on the.
Call, Pennsylvania, and Georgia are operating at optimal levels and the newer Texas DC is getting there and we'll be there. Shortly so I don't believe that the issues with the Dcs are going to prevent us from getting the goods to the stores in a timely fashion compounded by the late deliveries of some very important seasonal.
Put some undue pressure on this that I don't expect to see again, we're working very hard to offset those delays in the future and we believe we're well positioned in order to get the goods in a timely basis upload them to the stores when they need them. Obviously, we got a late start to this year, we actually received a lot of our toys and seasonal in November and we.
You'll have some goods on the water that probably will make up for the holiday. So a little bit short there and we will continue to improve on that piece, but.
The long term algo is fully intact I believe once we hit can you focus on 2022, we'll be back in shape and continue to deliver long term algo Q1 will be tricky because we're up against an 18% comp from all the stimulus that occurred so that will be.
A little bit of a challenge for us to compare against but I think going forward after that will be in line with our long term algo in and deliver the numbers that you guys are you seeing.
Great and then Jay.
So up on gross margin.
The fourth quarter guide assumes that 200 basis points moderation on a two year stack relative to the third quarter could you just break down the gross margin drivers behind that moderation sequentially and I think you gave some color on the first quarter, but if we think about gross margin for next year.
To think about it relative to the 38 six to $38 eight level that that will that will come out this year at.
Yes, Matt so that the gross margin headwind that we're talking about in Q4 is really being driven by these increased input costs that is the driver I mean, our merchandise margin is intact and right in line with historical levels.
So that's the driver in the import costs just like we talked about and then can you ask again your second question.
Gross margin for next year as a whole relative to the guide that you have this year for gross margin rate.
Yeah, So we're not.
We would expect we're going to see continued pressure like we said.
In the first half is going to normalize back in the back half right. So we would in Q3 and Q4. If you model that are going to be right in line with where they would be on a typical run rate for us on a normalized Q3 and Q4.
We're not giving guidance for 'twenty, two but right you probably ballpark with the pressure that we're going to see in Q1, and then it's going to get it sequentially a little bit better in Q2, Mr will be under pressure, but probably.
I would say 38, 2% to 38, 4%, 35% somewhere in that range.
Okay great.
Just to add clarity to that and make sure everyone understands it.
The back half of 'twenty, two we're expecting to be back in line with our with our historical gross margins that you guys had been accustomed to see so if you annualize the back half we'd be back at the.
Close to 40%, but because of the pressure in the first half that's going to bring us down probably to a 38 38, two somewhere in that neighborhood.
Okay, Great best of luck.
Thanks Pat.
Thank you. Our next question comes from the line of Simeon Gutman from Morgan Stanley. Your question. Please.
Hi, everyone. Good evening I know this may end up beating a dead horse by the time of this call is over but I want to talk about how transitory the supply chains are.
The supply chain issues are.
Comps being negative on a two year basis showed some some some some cracks and I think you mentioned the circular could be as good as it could be can you. Just also talk about in stock position across the store and any any categories that are of particular issues.
Yes, Simeon the issues really are transitory in nature in our opinion. Obviously there is there are certain times, where the imports are very very important to us and when you're bringing in toys holiday and heaters. That's an important time for us and we didn't we didn't get the the good and timely enough and where they were late arriving they they put pressure on us to be able to get.
Our normal product into the supply chain, so that created some issues for us to be able to get the product. We wanted to have be able to advertise in the deals got pushed behind the imports because those have to come in and that's something that we don't expect to repeat we're getting ahead of it at this point in time, and we're pushing hard to make sure. We don't we don't have the same issue occur is that all.
<unk>, we're very focused on it so there's not a permanent issue with the supply chain from our perspective, we're like we said we've got a we've got to rightsize our contracts with the carriers, we what we've done in the past worked then it doesn't work now so we've got to make some adjustments there with regards to the the sequential.
One 3% down over over two year period.
With all that we've gone through probably not too bad definitely not happy with it not impressed with it and we're not pleased with it at all internally here the availability of deals and goods are out there. We just got to get better at flowing them in timely and getting to the stores for our stores to be able to have them to meet the sales plan. So we feel very confident that we will be back in stocks here.
We got a late start to the holiday season, but we're going to really look forward to 2020 to get the stores back in the right position and get the inventory flow in the manner, we need that to be in stock for the stores and I think we'll be right back where we need to be.
So thanks for that it sounds like Youre pretty confident that this will pass.
Just for completeness I wanted to ask did you give any thought or consideration to slowing down the opening engine. Just so you can focus on fixing the supply chain and not get distracted by by openings or just.
The level of confidence you have as high and it wasn't part of the consideration.
Yes, I mean, it was not part of our consideration at all we don't think we don't think our supply chain is broken and we think we have a hiccup and I think everybody does in the marketplace and we the way we had gone to contract before it didn't work.
And it doesn't work on a long term basis for a company our size so.
These issues, we're having are definitely transitory in nature. There is nothing structurally wrong with our supply chain and our distribution Center network. So we didn't even give it a thought to slow down the growth because we believe we're in good shape right now.
Going to continue to continue to flow to the stores. So I don't think we have any hesitation to open anywhere from 50 to 55 stores and I think next year is $50 to 53. So we think we're well positioned to build to fill those stores and do good next year.
Great. Okay I appreciate the color and good luck through the holidays.
Thank you.
Thank you. Our next question comes from the line of Peter Keith from Piper Sandler Your question. Please.
Hey, good afternoon, everyone.
So I know you did address briefly the inventory level at the end of the quarter, but maybe just to give people some confidence in what you're sitting on could you break apart what is sitting in transit right now that that wasn't available for sale.
Yes, Peter of the 19%.
Increase about 25% of that was.
On the water slash the important product that was not available for us to sell.
The other the other 25% was.
Was in the Dcs and it was late arriving product that we got to the stores after the third quarter.
Was completed and the remaining portion is the capitalized cost and inventory.
Okay.
And so then.
My next question would just be using this inventory position.
I'm reading it correctly it sounds like you feel better about the inventory position with the fourth quarter versus the third youre not totally out of the woods, but it seems better.
But you are kind of guiding for the similar two year stack comp.
So is that.
Reading it correctly, you feel better about the inventory, but you're just you're holding at two year to be conservative.
Peter we feel much better about where we're at today on the inventory side, we did get a late start to Q4, we had a lot of our toys and seasonal on the water at the end of Q3. So we did a lot of shipping and receiving and the early early part of the fourth quarter, which would be in November so our stores I've got a lot of toys and seasonal during the month of November So we got.
A little bit of a late start so.
Feel real good where we're sitting today I would like to be sitting where I'm at today in the beginning of beginning in November some about a month later so we got we got a little uphill climb. So theres no reason for us to stretch and get ahead of ourselves I think we need to set an expectation of where we think we'll be where we think we're in a land if we do better we do better but.
We're positioned much better today than we were a month ago.
Okay sounds good good luck with holiday.
Thanks Peter.
Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo. Your question. Please.
Yes, Hi, hi, guys good afternoon.
Kind of curious if you could just take a step back for us.
First.
I am curious as to what the cadence of the comps look like throughout the quarter and then I was hoping you could help us to understand the timing of kind of what happened here because when you rip.
Reported Q2, you were sort of a third of the way through you guided to a two year stack of about five to seven.
And presumably you had visibility on some period after that so I'm just kind of curious as to how all of this progress.
And worked its way into the stores and then what you think the timing of that normalization ends up looking like.
Yes on a normal basis.
Ed I would I would've expected.
Probably a 30 day 30 day 40 day earlier arrival than probably where we're at today.
We couldnt see we Couldnt, we don't have clear visibility to that at the call at the end of August obviously, that's that's four weeks into the 13 week portion of the quarter.
But we were moving goods, we just werent moving them fast enough at the rates. We wanted to pay so we had a we had a shift gears.
Mid quarter and start making some bigger decisions to get the goods moving into the pipeline to building made that make the holiday sales.
The heater sales so that that was something that we in hindsight, we should have moved a little bit earlier, but.
But we were just being trying to be opportunistic like we were and we were we were moving the cans, we just to move quite a bit quite a mini as we needed to get to be at the level. We wanted to be at so.
<unk>.
In hindsight I'd be wanting to move earlier next year, which we will be in a better position I think that only bodes well for us in terms of our confidence for next year for the holiday selling season in Q3 and Q4 results.
And when do you think the opportunity starts working its way into your sales around the supply chain disruption thats occurring today and when a lot of that disruption ends up being your opportunity and win.
When you can capitalize on that.
Yes, I would tell you our merchants are would probably say that these opportunities are few of them have started to arise but the bulk of these opportunities will start in January or later after the holiday season.
I think there is still 80 ships out there in long beach, and so who knows what's on them, if somebody's product who need them probably for the holiday season that they didn't get or some other category that'll be something they won't take a takeover or cancel orders. So I think we are well positioned to capitalize on those.
So the order, sometimes they take a little bit of time to become.
Become available to us, but I would tell you 2022 should be.
Be a pretty good year for deals that will become available to us related to a lot of the supply chain disruption that's happening.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Jason <unk> from Bank of America. Your question. Please.
Great. Thanks for taking my question. So in addition to the supply chain issues. You mentioned that you are seeing some signs that your customer may be under pressure.
You mentioned some of the inflationary factors. So I'm just curious if you could talk a little bit more about what youre seeing in regards to that.
Yes, Jason This is John again with regards to we obviously know we have a low end customer and where we are seeing that those customers are shopping less frequently just from the mere fact that they have less disposable income we're not necessarily a.
Just a consumable organization, we have about 2022% of our business. The consumables. We're not we have a lot more in the discretionary side. So folks who are right now being crunched, a little bit with either gas prices or food prices. They may be selectively, making one stop somewhere else and not coming to us frequently to say is.
It used to and people are still feeling the higher income level people are still feeling pretty good.
But we do believe that the trade down effect is coming with the increased pressures are going to continue to feel on the inflationary side, but they have not started trading down so were dealing with one side of our business that that's getting crunched a little bit more.
Then we'd like to see them at this point, we're not seeing the trade down because people are still feeling like they have decent amount of money in there they're coming they're just not here yet.
Got it that makes sense and then I also wanted to ask about some of the strategic changes that you've made so I know in the past you've talked about the dry powder strategy I think on the last call. You had mentioned you had mentioned.
<unk> taken down some deliveries to stores to one times per week and some of the other supply chain.
Changes that were being made so I'm just curious about the progress.
Made on those initiatives.
Sure I'll take into chasing this is Eric.
Venerable.
We continue to make progress over the course of the quarter.
We upgraded the leadership team.
Primarily in the Georgia, and Texas facilities, which included the <unk>.
Managers.
And some of the managers and supervisory level.
Individuals as well and those teams have hit the ground running at sprint and we've made tremendous progress as John.
Syndicated.
Really in all three buildings, including Texas made significant.
Progress over the course of the quarter and over the last several weeks now into Q4, achieving a level throughput that's exceeded.
Historical high so pretty happy with where that building is headed as well, even though it disappointed us towards the end of Q3.
Three in terms of <unk>.
Process changes were.
Pleased with the change in delivery frequency to store, which just to make sure. We remember what we did we took.
Does a two stop.
Truck Ford, who have truck deliveries to each store each week consolidated to a one.
Truck delivery to each store each week, so theyre getting the same amount of freight.
On one delivery, which simplifies the operation Theyre getting all of the same product they're getting.
It delivers seven days apart now rather than every three or four days.
It has simplified the operation on the distribution side as well as on the store side.
<unk>.
Task to work one.
One sort versus two so we will get into too much detail there, but we're relatively happy with how thats all worked out we needed to make some changes on.
The store operation side as well.
Two.
To accommodate for that change and to ensure that we're taking any human capital constraints on the store side into account in making sure the product closer to the store as quickly as possible. We're also making progress in material handling investments, we're making investments as we talked about on the last call.
In commerce.
Sure.
Additional material handling equipment, primarily related to this order and an additional merge to improve capacity and also some other throughput enhancements related to productivity their material handling related.
We're making progress there we're a little later than we expected to be Jason.
We expected to have some of this is done.
In time for the holiday business. The biggest project was it at the end of Q4, we're now looking into Q4, probably beginning of Q1.
But the building is already performing at a level of throughput that is.
Properly managing our business now so these are enhancements that will get us.
A new level of productivity.
It will help us to manage expense will more effectively and help us to grow.
So those are progressing and then John mentioned the expansion to the York distribution Center, which is.
Primarily about propelling the growth of the company and supporting the additional stores, but it also gives us.
Throughput.
Fairly significant throughput enhancement.
As well so we're real pleased that we're going to be pursuing that.
To have that up and running by Q3 of next year will give us a lot more capacity from a throughput standpoint, as well as be able to support additional stores.
That.
That answer the question Jason.
Yes, It does maybe maybe for John if I can squeeze another one in just on the <unk>.
<unk> powder and keeping the open to buys.
Open longer just curious about if any of the supply chain stuff caused you to reconsider that strategy do you still think it's been the right move.
This type of environment.
Yes, I think that the dry powder.
Our strategy is one that's very important in the closeout sector. We operate in so we're definitely committed to it during during challenging times dry powder. It gets difficult for us to manage because the buyers are struggling with the goods getting in timely and it gets a little more confusing to whats getting what's coming and when.
They have to make adjustments. So we're looking to get back to a more stable dry powder right now.
The deal flow is strong the buyers are pretty full so the dry powder right now is not not necessarily.
As dry as I'd like to see it but with all the challenges we've had the buyers are doing their best to make sure we secure what they need in order to get get the inventory into the boxes. So were dry powder is probably two months away from right now because they're pretty much bought up for.
December and January and we'll get back to dry powder costs appear in 2000 22022.
Got it that's helpful color. Thanks.
Thanks, Jason Jason just to.
Quickly add because I forgot to mention the warehouse management system investments, we continue to make investments in warehouse management as well and the system enhancing it we've installed some handheld technology.
Q3, we're very happy with the results of that and some other automation work. So we're continuing to make investments as well.
Thank you.
Yep.
Thank you. Our next question comes from the line of Paul Lajoie from Citi. Your question. Please.
Hey, guys.
What percent of goods you guys import directly and I'm curious if there was a decision this year to do more direct imports than what you would normally do.
Relative to relying on more domestically sourced closeouts and also curious what percent of your sales are toys heaters in seasonal in the fourth quarter.
Yes, Paul with regards to our import business, we definitely did not make any concerted effort to bring in more imports we never try to bring a more imports we try to buy more closeouts in.
<unk>.
A necessary part of the business.
Continuity in certain categories, you want to have continuity and but we did not make any concerted effort to bring in more of imports, but imports run approximately 20% of our annualized purchases.
And that's very important to know its annualized there are certain seasons that it's heavy in certain Caesars is very light so with regards to Q3.
Normally right around 28, 29% of our purchases on a normal basis. This year because of the late arriving inventory it was closer to 39% that put pressure on our ability to bring in some of our domestic products. So we definitely want to get back to the 2008% to 29% or less.
In the future. So we don't want to repeat what we did and we will continue to push that we don't have that much coming in on the import side, but then it gets in the way of our domestic source Closeouts and we don't want to do that so historically, we've controlled at very very evenly and had a pretty consistent but this year with the delays that caused us a little bit of a little bit of a headache there.
Got it.
I forgot.
Hum.
You answered it.
What percent penetration or.
Boys toys.
So its theaters and we normally don't break that out.
Paul, but we would tell you that the seasonal business.
In Q4.
I don't know what the number is I'm not sure what the breakout it looks like for toys and heaters.
<unk>.
We don't typically talk about it but it can get up to six 7% in Q4.
Which part.
Seasonal.
No.
So it's always in seasonal would probably in the fourth quarter. It can ramp up food together combined.
<unk>.
I would say it could be 8% to 10%.
Got it and then just to make sure I'm clear do you feel like Youre missing missing those sales completely or are you just getting them late and maybe at a lower margin.
Paul definitely not missing missing sales completely.
We had it we have and had a good amount of inventory, we just werent at the levels. We wanted to be so I'll give you an a for instance at the end of Q3.
We had about.
$25 million and less inventory than we wanted to at the end of the quarter and we shipped out 28 million in the month of November to the stores to get us in stock.
So it was really just missing a portion of what we wanted to be at but.
It slowed our sales in the month of November because of that and obviously you heard us in Q3 as well.
Got it. Thank you good luck.
Thank you.
Thank you and as a reminder, if you have any question at this time. Please press Star then one our next question comes from the line of Jeremy Hamblin from Craig Hallum. Your question. Please.
Thanks.
And I wanted to ask it.
It sounds like Youre, making some investments in your.
Supply chain technology infrastructure.
In terms of thinking about the staffing on that side of the business.
Do you feel like you're Eric.
Eric maybe you can answer this do you feel like Youre adequately staffed.
And.
Do you think youre going to have some drag that really carries on given the mismatch in timing of shipments and so forth.
How much additional.
Staffing or are you going to have into Q1 and potentially into Q2.
Given what's happened on the timing here and the fact that we don't have maybe the technology infrastructure to flow inventory in a way that a lot of your competitors do.
Sure Terry all clients are.
We have the technology now to meet the throughput needs of the business as we move forward.
These enhanced enhancements, we're making R. R.
To give us even some additional throughput and to mitigate risk as we continue to move through environment, where were very challenged from a human capital standpoint, and that's obviously not unique to ollie's.
So I look at it is.
It's additional throughput beyond our needs to drive our business in terms of technology.
I don't know if youre question about staffing with specific specifically related to IP is that how I should take it or was it more.
The staffing more related to your distribution centers.
Even at the store level like typically youre going to have.
Downshift in your staffing levels in.
In Q1, because you are.
Not handling the same type of volume on stock in your shelf so.
Brian.
Just wanted to get a sense that that's really what I'm asking about.
We are as we move out of the holiday season.
Fairly comfortable with the staffing levels, we should be able to maintain to continue driving our business.
We've been more challenged in this moment, although we're not seeing it as a risk to our business, but it's certainly been a challenge on the seasonal hiring front.
For us so I'd answer the question.
Confident as we move through holiday that we will be appropriately staffed.
In the stores and the distribution centers.
We're also continuing to study the market and react to market forces and wage pressure out there to ensure that we continue to be adequately staffed.
To drive the business.
I think that I think one of the big takeaways for us is.
The issue that we had in Q3 is not a human capital issue. It was really the challenge of the timing of getting the imports in and how they affected our ability to get the imports and the domestic product through the the overall DC network Dcs are actually working very well we've done we've done a great job.
At hiring new associates hiring until levels that we need in order to operate and they were very excited about the throughput levels, we've hit with Pennsylvania, and Georgia, Dcs and we'll continue to push on Texas. We're very close so the throughput issue is pretty much wiped out now the Dcs can ship and process more than the <unk>.
Stores can handle so we've accomplished what we wanted to accomplish in the DC network and now we're just working through the last piece with the imports in the headache that that 20% of the business has caused us about 20% of $1 seven still a big number. So we got it we got to continue to focus on it and we're going to we're going to get better and that's all we can say.
We didn't have it set up right and we'll do better.
Great. Thanks for taking my question and best wishes.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to John Swygert for any further remarks.
Thank you operator, thanks to everyone for your participation and continued support we wish you a very happy and safe holiday season, and look forward to sharing our fourth quarter results with you on our next earnings call.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Yes.
Yes.
Yes.
Okay.
Okay.
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