Q4 2021 Ollie's Bargain Outlet Holdings Inc Earnings Call
Good afternoon, and welcome to the Ollie's bargain outlet conference call to discuss financial results for the fourth quarter and full year fiscal 2021. Currently all participants are in 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, Jay status, Senior Vice President and Chief Financial Officer, and Erik vendor Blake.
Executive Vice President and Chief operating Officer.
Thank you Jonathan good afternoon, and welcome to all these fourth quarter and full year fiscal 2021 earnings conference call a press release covering the company's financial results was issued this afternoon and a copy of their press release can be found on the Investor Relations section of the company's website I'd like to remind everyone that man.
Smith'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 factors that might affect future results may not be in our control and are discussed in 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.
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 of the most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings release with that I will turn the call over to John .
Thanks, Jean and Hello, everyone. Thank you for joining our call today.
Looking back at 2020 , one we navigated through numerous headwinds include unprecedented inflation and merchandise and transportation cost shipping delays of imported product and backlogs at our distribution centers. We worked aggressively to control we can control by leveraging our vast network of vendor partners improving efficiencies in our distribution centers and.
And negotiating in negotiations of import container contracts earlier than normal all while continuing to execute our retail expansion strategy and delivering great deals to our customers importantly, the changes we have made to our supply chain will enable us to navigate even better going forward.
During the fourth quarter, we delivered exceptional deals to our customers and made great progress getting our distribution centers back to desire throughput levels, we were able to secure additional import container capacity, which enabled us to deliver our spring merchandise on a timely basis to our stores. We believe we're well positioned for the spring selling season.
Turning to the fourth quarter results compared to 2019, our comparable store sales decreased 2% inline with our expectations.
We've remained focused on offering the most compelling values to our customers and are excited about the close of opportunities. We're seeing in the market today due to package changes created by inflation supply chain challenges canceled orders excess inventory overruns and product innovation.
We expect to see more deals come our way due to late arriving council merchandise and we'll remain nimble to ensure we capitalize on these deals.
We're seeing strong deal flow and health and beauty AIDS housewares hardware holiday seasonal bed and Bath automotive in pets.
This type of environment plays into our strengths our merchant teams are nimble and able to react quickly to secure great deals that we know our customers want.
The value we provide is more critical than ever as we recognize that our customer is being impacted by the rapid rise in inflation as prices for everything from gas to groceries has risen dramatically.
This leaves our customers with less discretionary income, we expect value to become increasingly important to all consumers. In addition, there are several other dynamics impacting our customers, including a shift in spending from goods to services and experiences.
A lack of stimulus and timing of tax refunds in the long run we know that our unique offering of compelling value will ultimately win.
Turning to real estate during the fourth quarter, we opened five new stores ending the year with 431 stores in 29 states.
We are pleased with our new store productivity levels.
We are currently experiencing delays related to permitting and construction of our new stores.
As a result, we plan to open between 44 to 46 net new stores in 2022.
We remain confident that our model can support at least 1050 stores in total and plan to resume a normal store opening cadence between 50 to 55 stores annually in 2023.
Okay.
We are excited to announce that for the first time in our company's history. We are launching a store remodel program. We plan to remodel 30 stores to our newest merchandising format in 2020 to.
The enhancements, we're making to the stores are expected to prove our customer shopping experience and to drive higher store sales overall.
Ollie's Army remains an important driver of our sales reaching over 78% sales penetration in the quarter.
The Army grew eight 5% over the prior year and in the period with over $12 6 million active members. We were pleased with Ollie's Army night, where we once again open our doors exclusively to Ollie's Army members for an evening of shopping and special discounts.
Yeah.
This year marks our 40th anniversary and we have several special events planned to celebrate this milestone.
For the first time since our 25th anniversary, we are holding a contest to crown America's biggest cheapskate by asking our customers that tell us why they deserve this distinguished honor and.
In addition, during our week longer haul. These days event will be including 40 terrific deals for our 40 year anniversary celebration.
We have a lineup of other great events to create excitement and we welcome you to join in.
Operationally, we have made refining refinements and enhancements to our supply chain due to the tighter labor market and the ongoing impact of Covid, we continue to find ways to improve efficiencies in our distribution centers and they are running well now.
Our Pennsylvania in Georgia distribution centers had been operating at full throughput levels. Since the end of third quarter of 2021, and our Texas D. C reached desired level in February late February of this year.
The 200000 square foot expansion of our York distribution Center is awaiting final permit approvals.
We plan to start construction once permits are issued and at this point in time expect to have it completed by the end of this year.
This expansion will provide us the ability to service an additional 50 stores for a total of 200 to 210 stores from this location.
This brings the total number of stores that we can service from our distribution centers to over 550.
As we continue to expand our footprint we plan to open our fourth distribution center in the second quarter of 2024.
In summary, we are excited about our 40th anniversary.
Our store remodel program and the incredible deals we're seeing in the market.
We feel good about our inventory position and have a strong offering of spring seasonal product for our customers that said, we recognize that we are navigating an uncertain highly inflationary highly inflationary environment.
Why are we are while we are confident that we will return to our long term algorithm. We anticipate continued pressure in the first half of 2022.
We expect to see trends improve as we move through the second half of the year positioning us to return to our long term algorithm.
We are focused on what we can control and believe that our business will benefit from an increased need for value driving consumers to trade down.
We are well positioned to capture this customer as a closeout retold the delivers extreme value and a treasure hunt experience.
The long term potential of our business remains firmly intact.
We have a long runway to at least 1050 stores, we have a highly loyal customer base that generates almost 80% of our sales in our stores generate a ton of free cash flow.
We remain committed to returning value to our shareholders as reflected in our increased share by buyback program that we announced in December .
In closing I would like to thank the entire ollie's team for their hard work and dedication during what has been one of the most dynamic and challenging environment in our company history.
We appreciate all that you have done to serve our communities and offer the best possible experience to our customers.
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 year.
For the quarter net sales totaled $501 $1 million, a two 8% decrease from the prior year.
Comparable store sales decreased 10, 5% in the quarter compared with the prior year comparable store sales compared to 2019 declined 2%.
Late deliveries of key seasonal product negatively impacted early holiday sales.
We would hope that as our in stock position improved as we moved through the quarter, we would benefit from last minute shopping. However, we found that many of our customers shop cooler earlier in the holiday season.
In the quarter, we opened five new stores ending the period with 431 stores in 29 States and 11, 1% year over year increase in store count.
Since the end of the fourth quarter, we've opened five additional stores, we plan to open 46 to 48 stores in 2022, including two relocations.
Gross profit decreased 10, 6% to $193 million and gross margin decreased 320 basis points to 36, 5% compared to 39, 7% in the same period a year ago the.
The decline in margin was due primarily to supply chain costs, which more than offset the 170 basis point increase in merchandise margin.
SG&A expenses, excluding a $100000 gain on an insurance settlement in the quarter increased 160 basis points to 23, 8% because of deleveraging due to the decrease in sales.
Adjusted operating income, which excludes the insurance settlement gain totaled $57 $3 million, a 32, 1% decrease from the prior year adjust.
Adjusted operating margin decreased 500 basis points to 11, 4% due to lower gross margin and deleveraging of SG&A expenses as a result of the decline in sales.
Adjusted net income, which excludes the insurance gain and tax benefits related to stock based compensation was $43 $9 million and adjusted diluted earnings per share was <unk> 69.
Adjusted EBITDA was $66 $1 million and adjusted EBITDA margin decreased 470 basis points to 13, 2% for the quarter.
For the full year of 21 net sales totaled 1.753 billion a decrease of three 1% compared to the prior year comparable store sales decreased 11, 1% for the year and increased three 6% compared to 2019.
Adjusted net income in 2021, which excludes the insurance gain and tax benefits related to stock based compensation was $152 $9 million and adjusted net income per diluted share was $2 36.
Capital expenditures for the year totaled $35 million, primarily for new and existing stores. This compares with $30 $5 million in the prior year.
Inventories increased 32, 1% to $467 $3 million compared with $353 $7 million as of the end of fiscal 2020 with almost half of the variance attributable to increased supply chain costs and the remainder driven by the increased number of stores in the timing of merchandise receipts.
In addition inventory days at the end of fiscal 2020 were reduced due to heightened levels of sales productivity throughout the fourth quarter last year.
Most importantly, we're comfortable with the quantity and quality of our inventory in our stores to date and believe we are well positioned for the spring selling season.
At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $247 million in cash.
During the fourth quarter, we invested $20 million to repurchase approximately 435000 shares of our common stock.
For the full year, we invested $220 million to repurchase approximately $3 1 million shares of our common stock with current and currently have approximately $190 million remaining on our share repurchase program.
I will share some high level thoughts on fiscal 'twenty two.
Our full year comp guidance is within the range of our long term algorithm on a three year basis.
That said, we recognize that we are navigating an uncertain and highly inflationary inflationary environment, while lapping significant stimulus in the first quarter.
At the same time, we continue to face higher transportation product and labor costs. We believe that these factors will have a bigger impact on our first half results as we lap these headwinds and begin to benefit from the actions. We are taking to offset these pressures in the second half.
Based on these different dynamics for the full year, we expect total net sales of 1.908 to $1 $92 $6 billion.
Comp store sales of flat to plus one or in line with our long term algorithm on a three year geometric stack basis.
The 40, the opening of 46 to 48, new stores, including two relocations.
We expect to open eight stores in the first quarter 12 in the second 17 in the third quarter and between nine and 11 in the fourth quarter.
We expect full year gross margin of approximately 37, 2%, reflecting increased supply chain costs, especially during the first half of the year.
We expect this margin pressure in the first half to result in similar year over year declines in gross margin in each of Q1 and Q2.
We expect some sequential improvement in Q3.
A return to normalized overall gross margin levels in the fourth quarter.
We expect operating income of between 182 million $87 million.
Adjusted net income of between $136 million to $140 million and adjusted net income per diluted share of $2 15 to $2 22.
Both of which exclude excess excess tax benefits related to stock based compensation.
Depreciation and amortization expense in the range of $28 million to $29 million, including approximately $6 million that runs through cost of goods sold.
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 $63 million.
We expect capital expenditures of $53 million to $58 million related to new stores store level initiatives, Our York DC expansion and it projects.
For the first quarter, we expect total sales of approximately $417 million to $422 million.
We expect comp store sales to be down 15% to down 14% as compared to 21.
On a three year geometric stack basis, we expect to be slightly negative in Q1, as we lap unprecedented stimulus.
Gross margin is expected to be approximately 35, 8%.
Operating income of $26 5 million $28 million and adjusted net income of between $20 million and $21 million.
And finally, adjusted net income per diluted share of <unk> 31 to 33, both of which exclude excess tax benefits related to stock based compensation.
In closing, while we have will have pressures in the first half of 'twenty. Two we expect improvement in our margins and metrics in the back half with the expectation of returning to our long term algorithm I.
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 your Touchtone telephone. If your question has been answered and he'd like to remove yourself from the queue. Please press the pound key our first question comes from the line of Brad Thomas from Keybanc Capital. Your question. Please.
Hi, good afternoon, John and Jay.
Wanted to ask about how youre thinking about same store sales as we progress through the year.
I think if we try and do some quick math on it given how difficult the comparison isn't in one queue.
To get to the full year guidance.
Does imply that perhaps you maybe above your normal comp outlook as we get into later quarters.
Any more color you can provide on how you're thinking about comps through the year it would be very helpful.
Yeah, Brad this is Jay.
We really focused on a three year geometric stack calculation, so using 2019 as the basin going.
Forward from there so on a full year basis that comes in at.
At about 104, 4%, which is right in the range of one or two for those three years and to your point Q1 is going to be off of that you know by call it four or five.
Percent right. So it's going to be under you know, it's going to be closer to 99, saying negative one in Q1. So we will have to make that up in Q2, three and four.
When we do that math that equates to about a one in a 105 five call. It on a three year geometric basis for those remaining quarters, which.
On a three year average would be about one 8%.
So still within the range, that's how we're thinking of it.
That's very helpful. Jay and then I put the remodeling program sounds pretty encouraging I was hoping you could just talk a little bit more about.
What that entails how much you're going to be spending and what sort of uptick youre looking for from those investments.
Sure Brad This is Eric I'll take the question.
Super excited about this initiative, we have an aging fleet of stores, which will benefit from some attention.
Our primary objective is to enhance the customer experience, how the customer experiences our merchandise.
We're right sizing repositioning categories to reflect our current new store format. One example is we are decreasing the linear feed committed to our books business and increasing the space would give to Pat so one.
I think very good example of what we're doing.
We're also improving the impulse shopping experience.
Many of our older stores do not have a race tracks installed so we're installing racetracks enhancing existing race tracks in the stores and do you have them.
Reconfiguring the front end, which includes adding registered queues in many of these stores.
I think keep in mind and I'll get to the question Brad about what we're spending in a sack.
We are in the deep discount business and it's important.
Yet we retain what we like to refer to as our semi lovely charm.
And that the store environment is part of how we communicate our value proposition to the customer or spend on average is going to be 125000 per store.
And we're in test and learn mode. Now we completed two and we just completed in the last several weeks. So it's very early we're pleased with what we're seeing so far.
We expect the payback to be in line with the return we get on new stores.
Not ready yet to say what that means in terms of comp sales lift because it's just a little bit early in the process to be able to speak to that but we'll commit in future quarters to talk more about this as.
As we get more experience remodeling additional stores.
Yes, I think Brad the only thing the only other thing I'd add too. It is it's only it's only 30 stores out of 440. So it's relatively small percentage. So it's really this is the year of test and learn and see what we learn from it and then we can step on the pedal with it in 'twenty three in out years.
Okay.
Very helpful. Thank you all so much.
Thanks, Brett Thanks, Ryan.
Thank you. Our next question comes from the line of Kate Mcshane from Goldman Sachs. Your question. Please.
Thanks, Good afternoon, thanks for taking our question.
I wondered if you could talk a little bit about <unk>.
<unk> and how it trended throughout the quarter.
Have you seen an improvement in traffic.
Quarter to date.
Just from a first half back half standpoint.
With regard to the comp why do you think second half will be better or is it more commentary on what you will be lapping or is it.
The fact that will be further away from our March stimulus. If you could give a little color around that that'd be helpful. Thank you.
Kate This is John let me answer your last question first and then maybe.
Jay can handle the <unk>.
The question with regards to the fourth quarter with regards to 2022 and the back half. We just believe that first and foremost lapping the stimulus and getting all the stimulus out of the way is paramount to us get back to running our normal business, but most importantly, we believe the second half.
We'll be able to lap what we had talked about a lot in Q3 of last year with regards to the delayed shipments the theme.
Called the challenges, we had with the late arriving import product and the holiday product that basic colliding with all of our closeout goods that were domestically sourced and we had to prioritize the the way we moved our product through last year and the disruption we created with that we just believe we're set up well and we're positioned in them.
Much much better shape this year with our supply chain our distribution centers are running at the right throughput levels that will be a much better position to really kick off once we clear the stimulus here that started March of last year that we think ran through a good part of may almost seem to made so I think once we see that that to get out of the way and the position of inventory.
Stores me, a much better condition will be ready to go.
And obviously I think one of the big takeaways I know you mentioned forgot about it is the deal flow is really starting to pick up and we're starting to see some things shake loose I think we're in a position here.
We're going to see some some big benefits.
And Kate this is Jay just to add on to that the first part of your question. We're not you know, we're not going to get too granular on the current quarter trends. So can't give you transactions, but I will say.
The comp that we're seeing so far is a little bit better than the guide, but with that said we were coming into the heat of stimulus from a year ago. So the next four weeks.
Four to five weeks were super strong last year because of the stimulus.
And so hence we've got a long way to go and hence why.
The guide is where it's at right now currently trending a little bit ahead of that.
Thank you.
Thanks kit.
Thank you. Our next question comes from the line of Peter Keith from Piper Sandler Your question. Please.
Hi, good afternoon, everyone.
John I wanted to ask as a follow up you were talking about some closeouts are starting to shake loose that you're pretty excited about.
And then just I was hoping you could reflect back on 2021.
<unk> been adamant that closeouts throughout the year have been pretty strong, but I'm wondering if there's a quality versus quantity issue. Maybe there has been a good quantity of closeouts, but do you feel like the last 12 months the quality that you'd be able to get has been maybe a bit depleted just given the global supply chain challenges.
Yeah, Peter we haven't felt that the the quality of the Closeouts had been impacted I think our ability to move the goods through our network was the biggest impact we experienced last year I think that was one of the the big takeaways are our merchants really struggled because they had the.
Product purchase for specific times, when they needed to arrive for certain adds in certain periods with the seasonal selling season. It just didn't happen and that when you put the merchants on that that back burner like that and they can execute what they're used to seeing it makes it very difficult for us to put our ads right put the right item right items.
The ads that we have in all the locations. So I don't think it was up.
Quality issue, obviously, you need you need a couple of big.
Hot deals are needle movers that we look for in last year with all of our our struggles in the supply chain, we couldn't execute at that level.
I believe this year, we're seeing.
Good quality and good quantity of inventory and we're able to move it through the network into the stores on a timely basis. So the merchants have their momentum back in their confidence back to be able to execute and that's why we're coming from a position of strength.
We're starting to see very recently that.
The closeout.
Funnel is starting to open up as we had expected it to it's just starting right now that we're starting to see some some real strong deal flow I don't want to get into any details I think thats a competitive issue that I create for myself when I talk about things, so I'm going to let it just let it be that is strong and we're feeling good where we're sitting in the numbers we'll show it.
Okay, Alright, that's encouraging and maybe separately you could maybe talk to Jay on this one but the merchandise margin.
Up 170 basis points, so it's accelerating a little bit from Q3.
Just in regard to that is it pricing are you guys being able to take a little more price than you were earlier in 2021, maybe the competition has loosened up a little bit can you talk about how youre, maybe offsetting some of these elevated freight costs.
Yeah, Peter that's a good calling and yeah I think you know.
To your point, we were able to take some price in the quarter.
And we had talked about that on the last call. So that did come to fruition I mean, obviously, it's very important now we maintain our value proposition.
But yeah, we merch margin up 170 basis points and then the overall was down $3 20, so the supply chain.
The remainder of that and when we look to our plan for 'twenty two I mean, we are expecting.
Some level of expansion on merchandise margin to continue obviously, we're going to continue to have headwinds on the supply chain side.
But those are heaviest in the first half and they start to abate in the third quarter and then the fourth quarter is really kind of a normalized historical margin.
Okay. It sounds good guys. Good luck.
Thanks Peter.
Thank you. Our next question comes from the line of Matthew Boss from Jpmorgan. Your question. Please.
Great. Thanks, So John on the topline maybe could you just speak to any behavior changes that you're seeing from your low income consumer potentially tied to inflation or any trade down that youre seeing yet from the middle income consumer and Jay tied to that as we bridge the first quarter down mid teens. So that's full.
All year flat to up one comp are you embedding today's macro backdrop or is it baking in any impact from potentially higher gas prices as the year progresses.
Yes, Matt This is John let me answer the.
The first question with regards to the the lower income consumer.
What we can see what we can see and what we feel mainly as we believe that the the very low end consumer.
People aren't fixed incomes people who are on welfare.
Theyre getting fronts pretty good right now and they've been getting crunch for awhile and when you go grocery shopping you you get a big Shocker now and look at the price where it was before where it is today and obviously with the gas Spike most recently in the last month that just adds more paying for these folks. So I do believe that the folks who are on a very tight fixed income where we're seeing them.
Ill get crunched, a little bit.
Fortunately for us it's not a huge percentage of our business, we were not and we don't take EBT cards, we don't have.
Perishable foods and our stores. So we've always said we have discretion non discretionary items in our stores, but it's somewhere between 22% to 25% of our business. The rest is all discretionary so we cater to a very wide range of folks.
Our air market.
I don't think we've seen the trade down effect hit us yet, but I got a real strong feeling is coming pretty soon.
Once people start putting gas in their tanks for 345 weeks in a row and pay for grocery is not pay higher utility cost I believe its coming and its something that would that everyone's going to see here in very short order and I think we're positioned well.
We're feeling that we're in the right the right position right now we're starting to see the deal flow is going to benefit us in the second half of the year.
And Matt.
To answer your question about the guidance I mean, obviously the comp guidance is right in the sweet spot of our long term out of the one to two comp.
You know, we're a little more.
Cautious about Q1, just because it seems like it's been such a dynamic environment with all of these factors that we're talking about with the consumer right now to John's point, we're not necessarily seeing that trade down effect yet.
But historically that has happened and we have great deals.
So yeah, I don't think Theres anything really you know for the macro items and around about control, we haven't embedded additional conservatism.
We're saying this guidance other than maybe a little bit in Q1.
Great and then maybe just one follow up on the expense front.
Reinvestments that consider this year.
Just how best to think about.
Historical I think it was one to one and a half comps for leverage as we think about wages or maybe just any puts and takes on the expense front.
Yeah, Matt This is Jay.
When we look at it.
We're expecting a little slight deleverage on our SG&A and call. It 10, or 20 basis points I would say in our plan versus last year and we have made 21, we made significant investments.
At the store level and the Dcs, but that's obviously captured in the gross margin on the D. C front, but we did make significant investments in the stores.
We made.
<unk> this year related to the merit increase for the year, but we're not expecting a major step up in 'twenty two like we saw in 'twenty one.
We will have some additional investments around just some simple things like starting to get the teams together again, so with traveling with meetings. So we have a little deleverage from that.
Got a little deleverage from the incentive comp, which obviously in 'twenty one.
It wasn't as high as it will be at least in the plan for 'twenty two.
Great Best of luck.
Thanks, Matt Thanks, Matt.
Thank you. Our next question comes from the line of Simeon Gutman from Morgan Stanley . Your question. Please.
Hey, John This is Michael Kessler on for Simeon Thanks for taking my questions.
I wanted to ask about Hey, guys I wanted to ask about the 'twenty two guide in a broader sense. If you look at the implied midpoint for EBIT. The CAGR from using 2018 in 2019 as a baseline.
To round three ish three 5% annualized growth, which is below where I think you had historically been on a growth rate and when we might expect and theres been a lot of puts and takes over that period of time, so as we.
Thinking about 2022 and then moving onwards is this the right potentially the right new baseline level of operating income for the business is there a potential for some I guess recapture of growth in 2023 to the extent that some of the headwinds that are still playing out in 2020 to abate just how do we think about 2022.
In the broader sense of how you're planning that business in the go forward growth platform that profile. Thank you.
Yeah, Michael I think the biggest thing that that focus on is the impact of the gross margin. When you look back at 2018 or 19. This year theres significant pressure in the margin that we discussed and pretty pretty great detail for 2022, we totally expect that for 2023 will be back to our long term.
I'll go and back to very very close to the 40% gross margin. So the EBIT margins should be back to very close to what historically they've been in the growth should be pretty consistent as well. So this year is just contract a little bit because of our gross margin pressure that we have with the supply chain costs. We have to we have to work through through the first two to three <unk>.
Orders of this year.
Okay, Great and maybe just a quick follow up on your last point there on.
That 40% gross margin target and goal to get back there.
Can you first talk a little bit about I guess, what are the biggest levers of how you're offsetting.
The increased transportation and supply chain costs, I know price and we talked about the merchandise margin expansion earlier.
How big of a role is that playing versus other mitigation actions and then just one last one on the pricing that you have taken any.
Response from the customer as far as the recognition.
Trading within the store or anything to call out as far as the willingness of the consumer to accept those those higher prices.
Now, let me take the easy one first and I'll give the second part too Eric with regards to the increased pricing in the stores. That's obviously been very very selective on our behalf and it's all been comp shopped against competitor. So we still maintain the value proposition. So for instance, a walmart and golf on item <unk>.
They're two way if Walmart finally went up for someone else went up they had a comparable item. We would go up accordingly, but we didn't keep the same or similar profile from a value proposition. So that that's not something that that were losing and we're we're that's our model. We keep we stay true to that very heavily so the merchants wash that each and every day from a value proposition.
And then I can let Eric talked about some of the puts and takes on the margin. Thanks, Sean.
Michael You mentioned was one of the most significant actions, we're taking to mitigate.
The gross margin pressure in <unk>.
Import container costs as is by far and away the number one action.
And the number one incremental expense.
In terms out impacts margin John referenced in.
These opening remarks that we started to negotiate container contracts much earlier this year than in a typical year really several months earlier, we've made a ton of progress.
We're very pleased with the support that we're seeing from the carrier community.
We've started a number of new meaningful relationships, we significantly increase the overall capacity at contract rates in previous quarters, we've been discussing how reliant we've been on the spot market in 2021 about 80% of our import freight was procured on the spot market.
In 2022, we expect that to be less than 20%.
Inverse of what we experienced in 'twenty one.
The are the costs that we're expecting to.
See in 'twenty two are certainly higher.
Than our historical average, but they are significantly lower than the spot market rates, we were experiencing in 'twenty one.
And we believe the rates are in line with where the market our sense of where the market generally is for this next year.
The reason why youre seeing kind of more of the benefit in the back half of the year as.
Our contract years starts in Q2. It starts are actually in May. So we began to experience the benefits in Q3, and then kind of the full benefit of those new contract rates in Q4.
Yeah.
Alright, Thank you alright. Thanks.
Thanks, guys.
Thanks, Michael.
Thank you. Our next question comes from the line of Scot Ciccarelli from true of Securities. Your question. Please.
Hey, guys Scot Ciccarelli.
It sounds like you guys were obviously negatively surprised by the magnitude of supply chain issues that throughout the year, John you double down on that idea with your comments about the difficulty in flowing goods I think Eric was just talking about kind of the change it from spot to contract rate, but can you guys provide any other example.
Specific examples as to why the supply chain issues won't be as substantial in 'twenty two at least once we get past the first quarter here.
Yeah, Let me answer it a little bit Scott and then Erik may have to add some fine tuning points to it but with regards to why do we feel better than we did last year I think.
Very easily put we've invested.
A lot into our distribution Center network, we've made a lot of changes we made process changes we've.
<unk> invested in a new head of distribution center to run the business, who we think is more able to do and grow with the company.
But I think the biggest takeaway is we invested a lot in labor to get our head count where it needed to be.
Invested in processes to increase efficiencies in the building.
Buildings, and we're heavily focused on that today, we feel good where we're sitting and obviously, there's one pieces as the distribution center operations, but the other pieces the inability to move your import freight in a timely fashion and having a collide with all your other product and.
And then having to try to work through the inefficiencies created on the arrival of goods that are late.
To the to the party and trying to get them to the stores. So with those with those things behind US I would tell you we feel very confident where we're at we were we were successful in Q4 and I think as I said my my opening remarks, we feel well positioned for our spring selling season, and we focused very heavily on the important container movement early.
<unk>.
The season, and we got our goods into the funnel and we're positioned well and we know we learned a lot through a lot of paying went through last year and I would tell you I think we know how to avoid those pitfalls going forward and I think the the contract discussion Erik had a few minutes ago is vital to making sure we've got got the.
<unk> contract commitment and the right container commitment to move the goods in a timely fashion.
I think Scott John John John did a great job.
Particularly in some of the details here and I would just say when I answer Michael's question I was more focused on the cost implications of these contracts, but the capacity.
Benefits are huge for us, we certainly scrambled and work very quickly.
In Q2, moving into Q3 of last year to make sure we secured capacity, but the capacity secured at spot market rates now you have contracted capacity at a more favorable rates. So that capacity means that we can flow our goods more fluidly, when we need them, which helps with throughput in our distribution.
Centres as well because we don't get the log jam of goods, arriving kind of out of cycle. When you know when we're supposed to get those goods and having to deal with kind of the spices.
Of inbound associated with that.
I guess I'll, just really quickly add on the distribution side and John touched on this we did invest in people including leadership.
In many different important positions in our organization, we invested in people from a wage standpoint.
We've made numerous process improvements over the course of the last nine or 10 months, including investing in.
Our systems on the IP side.
Making investments to parameters and making adjustments to systems and handheld devices. We've talked about on previous calls and just final note as we continued to invest in material handling equipment.
Building a primary focus and then the commerce facility. So we're continuing those investments too.
Hope that building, which with throughput with speed with.
Efficiency in New York expansion is also a reflection of getting both.
Capacity to service more stores out of that building and more throughput to service spikes in demand.
Got it okay. Thanks, a lot guys.
Thanks Scott.
Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo. Your question. Please.
Hi, guys good afternoon.
I was curious about that on the inventory side. It looks like you ended the year with inventory per store up solidly above 2019 now just.
Any additional color here on how much of this is I think it did carry some product forward from holiday that kind of came in late I don't know how much of that is just higher acquisition cost versus.
Just generally John like how do you think inventory stand today.
In terms of like how you would like it to be as we start thinking about.
Sales and quality of.
Of what's available.
In the coming months.
And I'll I'll take part of it and let Jay give you the technicalities with regards to the overall inventories.
The inventories are actually inflated.
Over 2000, 1918 2020, whatever years, you want to look at it just because of the increased supply chain cost that are caught up in the cost of the product.
So I would tell you the actual in store inventory over 2019 would not be higher.
In the store so that that would be not a right number was we were actually a lot higher than 19, but I would have liked to seen ourselves.
But there is there is obviously the the inflationary pressures on the products. So theres some of that embedded in the numbers that we have.
At the end of 2021, but overall.
I would expect that we would see increased inventory levels compared to 21 in the first half of the year be pretty significant.
With the increased supply chain costs rolling out eventually after the first half of the year and then just the inflationary pressure of the goods I would expect to probably see.
Close to.
25% increases year over year, and then moderating to about store growth in the back half of 2022, but the overall inventory position, we feel really really strong war sitting and obviously like I said the deal flow is a byproduct of that as well.
Okay and then the other thing wanted to ask you about is out on the on the Flyer side can you just talk about how like the issues that you've had at supply chain has impacted that.
The product that you've been able to put into the flyer.
And I guess potentially how that also may play some role in in store traffic.
Sure.
That's obviously a.
Bigger a bigger challenge than one might think but the the time, we the lead time, we have from go into go into press and putting the flyer to print and having goods available in the D. CS.
Is very integral and the merchants to be able to advertise the product they purchased and to give us continuity and confidence of goods will be here. So that that definitely created some some issues in the back half of last year as well that we had to navigate through.
It wasn't for a lack of product per se, but as a lack of continuity in all three buildings to be able to put the flower together and then the timing of receiving the product obviously seasonal product that wasn't here in time. It couldnt put it in front of you watch a version would be here in time, so that that obviously.
Created some challenges.
In 2021 that we don't expect to have in 'twenty two 2022 only we plan to be back at a normal cadence when the merchants are ready to put it add together that we know where the products and the one that's going to be here and available for the stores on a timely basis. So that that is a big part for us and a big part of our confidence going forward as well.
Great. Thank you.
Thanks, Ed.
Thank you. Our next question comes from the line of rainy Kony.
Jeffrey your question please.
Hi, This is Cory Carlo on for Andy Connick, Thanks for taking our questions.
First on.
Customer acquisition efforts can you maybe highlight.
Some of these recent efforts to enhance new customer acquisition and then how has retail customer traffic conversion then to Ollie's Army.
Sure Cory with regards to our we obviously as we said we've been working on a I'll call. It a digital transformation at ollie's and what we need to do differently than just print on the long term with the changes that the world's going through.
Obviously, I think three of the strongest pieces that we've introduced and we feel good about.
Using stitcher adds either on Facebook or Instagram, we think that's been very powerful Google local and then using Sasha with cartilage kicks in.
I think those are our biggest three pizza right now that we've been able to see a benefit on from a digital perspective.
2022, we're gonna be testing.
Tick tock.
Which I would've never thought I'd say that out loud.
Youtube Pinterest end user and influencers in certain certain areas that work for ollie's that will continue to work through but print is still very very important for ollie's, where we're still committed heavily to print, but we understand that the customer is changing and we need to change with the customer.
So the digital the digital World is where it's all going but we still have our fair share of older customers. So we're going to continue to do both.
And we just have a small decrease in the print as we continue to invest in the digital front.
Right and then on the retail traffic conversion to Ollie's Army.
It's.
We're strong in conversion compared to previous years.
To answer your question Cory so.
We're seeing better.
And at the point of sale.
Than in any previous year.
Great. Thanks, very much and then just to follow up on deal flow I believe you mentioned strength in health and beauty.
A motive and pets are there any categories that have been a little bit more difficult.
As of most recent Cory I would say in some of this is just timing of deal flows and how deals come about but I would tell you in some areas in our food category, it's been a little tighter than we'd like to see it.
Food and the timing of some of our candy deals had been a little tighter this year than we'd like to see from from that perspective, but we're working on some other value programs to try to augment any any pressure we have with these two categories, but other than that it's been pretty feet free flowing in a pretty powerful.
Understood. Thank you very much and best of luck. Thanks.
Thanks Courtney.
Thank you. Our next question comes from the line of Jeremy Hamblin from Craig Hallum Capital. Your question. Please.
Thanks for taking the questions I wanted to start first with the store openings.
And understanding better the expectations around the cadence of your openings.
Through the course of the year, you know kind of starting with Q1 first half and moving into the back half of the year.
Yeah.
Jeremy This is Jay and we talked about the openings by quarter or in the prepared remarks.
Can you just refresh them because I didn't capture all of them that'd.
Yeah for sure we have.
We're planning eight stores in the first quarter 12 in the second quarter.
<unk> 17 in the third quarter and between nine and 11 in the fourth quarter.
Okay, great. Thank you and then.
Just coming back to the gross margin for a second.
So I think back in December you were looking at at the Q1 gross margins.
Like 35 flat range.
It looks like you're expecting a little bit better than that now at 35 eight.
Eight.
But in terms of thinking about the rest of the year I think it sounds like youre expecting it back to be kind of a 39% plus by Q4.
Is there going to be.
Similar type of year over year decline in Q2.
And then I guess.
A significant improvement by Q3.
But still down year over year any color that you could share there would be helpful.
Yes, so we are expecting the year over year decline in gross margin in Q1 and Q2 to be consistent.
We expect some sequential improvement in Q3.
So maybe it's about half of that and then we get back to normal in Q4.
Got it and then last one for me on the labor side.
In terms of wage pressure that's out there, but not just wage pressure also retention of employees can you provide some color on the turnover you've seen.
Kind of a year over year hourly wage cost increase and whether or not you feel like you need to take it even higher.
The rest of the year or what what's embedded within your plan.
Yeah, Jeremy this is John with regards to the hourly.
Employee at store level.
Has and continues to be a very transient worker.
We're making some changes in our in shifting the.
The thought process between part time versus full time employees, but in terms of the overall hourly investment. We've always said, we will look at it and we adjust it market by market by market. We don't just make it a global change.
We have made a lot of investments last year in the stores.
In certain markets, where it was necessary, but we just don't make a blanket adjustment.
We we react.
Every time that something happened. So we don't we don't let we don't sit on our laurels and just not do anything. So we don't expect any major shifts this year and the incremental pay at store level and we don't have anything like that baked into our plans. We have what we have what I'd say, a moderate increase and we've done a lot of changes already in 2021.
That we're carrying through in 2022, and we're working on increasing efficiency in the stores as well as the Dcs to be able to pay for some of that but that's what we were looking at in the the turnover is not much different at the hourly associate level that it has been historically from our perspective little bit harder to find people to work now.
Whether it be for unemployment or as people out of the market, but I think that's gonna be changed here insurers as well.
Great. Thanks for the color best wishes.
Thank you.
Thank you. Our next question comes from the line of Paul Lajoie from Citi. Your question. Please.
Hey, guys can you talk about what percent of your sales are currently on closeout product how does that look in 'twenty one versus nine.
19, and just how you're thinking about that.
For 2022 and beyond.
And then kind of a similar question in terms of the percent of your goods that are imported what does that look like in 'twenty, one versus 19, and how are you thinking about it in 2002.
Yes, Paul with regards to our Closeouts in 'twenty, one versus our Closeouts in 2019, we were at about a 65% close out rate in 2021.
2019 was probably close to 70%, which would be closer to our historical average that we as a company strive to be at.
I would tell you in 2022, we're going to do everything in our power to be at 70% closeout, because that's what makes us model special.
Think theres going to be a big opportunity in that area. So.
Somewhere between 65 and 70 in 2022 is what I would project from a closeout perspective.
Don't expect a big change in our import.
Ponant that we that we work on I think our imports come in at about.
18% of our overall business.
He loved to see imports down to 10%, but I'm sure that won't be able to happen.
But we'll we'll be we'll be pretty consistent in our in overall metrics in terms of the breakdown of our product and how we move it.
Got it and then just a follow up I'm, sorry, if I missed it but as you think about your comp expectations.
For the rest of the year beyond one Q how are you thinking about it from a traffic versus ticket perspective like how much does pricing play a role in the comps that you expect to achieve.
Achieved in quarters two through four.
Yes, I think I think Paul.
We don't look at.
The transaction versus the ticket we look at the value in the deal.
Motivate the consumer to come in the store. So it's the strength of our deals and I think obviously another piece that we've talked about is our ability to get our product in the stores on a timely basis and the seasons that we need to have meant to be able to motivate the consumer so that's a big piece that will be.
A driver to our business, but it's really what drives the customers the value that we give to them and the deals we get to them so being late to holiday with your toys and late to holiday with your seasonal doesn't help your business and obviously when that slate something else gets substituted afford and sits behind doesn't get into the stores as well, so with us being able to get our throughput.
Levels of that today and get everything to the stores timely that's going to be the benefit we're going to be able to bring to the bottom line.
Okay. Thanks, good luck.
Thanks, Paul.
Our next question comes from the line of Brian Macnamara from very Bird capital markets. Your question. Please.
Hey, Thanks for taking my question, so having 80% of your import freight in the spot market in 'twenty, one slip so less than 20% in 2022, I'm curious is that a permanent change away from your previous opportunistic approach or are you simply adapting temporarily some shorter term supply demand dynamics.
If so what's the risk that you're contracting out of potentially an opportune time as capacity comes back online.
<unk> and such normalized.
I think that the supervisory Brian did.
Super honest answer your question is I don't know I don't know, we really don't know what this year is going to bring or what future years are going to bring its a super dynamic market.
Out there, where we're doing some things to somewhat hedge our bet on this leaving enough volume out there for spot market to be opportunistic.
A little bit of flexibility around kind of how we're riding our contracts as well.
So I'm not really sure I know that there were some companies out there doing multi multiple multi year deals.
We resisted that and said we're going to contract just for the for the one year.
And.
And we'll see what happens is the question about long term with this thing is going to look like.
Not sure I think we're gonna have to navigate the market over the next two to three years to kind of see where things land.
I would expect if they're closer to.
And a normal that we would why a fairly large percentage of our.
Trade is to be under contract in a normal year.
And that debt.
That you are mitigating risk by having more freight under contract and if rates arent moving in a significant way up and down.
It's just a better position to be in.
But we're we're flexible and I'm not sure that the model that we were all used to for many many many years until the dynamic happened is going to work in the future.
Got it and just a quick follow up.
Big four pandemic quarters from Q2, <unk> Q1, 'twenty. One I think you you recruited about $1 4 million Army members can you speak to the engagement of these specific members are they still engaged or are there other spend and frequency trends better worse or in line with the rest of the army. Thank you.
We're seeing this is Eric again, Brian .
We're seeing.
Good engagement and good retention.
<unk>.
From those customers.
So when I when I say, good I mean similar to previous years engagement. So our retention is good set we're satisfied with it.
In terms of the overall spend it's pretty consistent compared to previous years, maybe slightly better compared to the non ollie's army members versus previous years, but I would consider to be pretty consistent so we do like the behavior.
Of those customers from what we've seen so far.
Yes.
Thank you. Our next question comes from the line of Mark Carden from UBS. Your question. Please.
Good afternoon. Thanks, a lot for taking my questions. So first a quick follow up on the store remodel program. There's obviously a lot of moving pieces right now with the supply chain and macro backdrop, just given all the noise what jumps out to you that led you to decide that this is the right time to start the program.
Okay.
In visiting for my part in this and visiting.
Many stores dozens of stores over the last.
Six to nine months.
It seem readily apparent that we have an opportunity to re space are <unk>.
Stores in that opportunity.
It seems significant enough that we should begin getting experience as quickly as possible.
Three Yates drain on the supply chain in any way shape or form because we're moving product around in the store that's already in the store supplementing certain categories that we expand and tracking other categories.
Net no impact of the supply chain.
Ultimately, where where the business has been most graph.
So.
Yes.
Super excited as we walks over all of the stores that we opened in the Eighty's ninety's.
And recognize that they.
It really just don't.
Reflect our most current thinking and how we want to present ourselves to the customer. So yes, no time like the present to start and start to learn.
Fair enough that makes up that makes sense and that's helpful. And then just as a follow up how much of an impact at all micron have on your supply chain.
It was immaterial.
But it felt painful in the moment.
We give you a little bit of color.
Our Pennsylvania distribution center actually was most significantly impacted and the impact was for maybe 10 days.
Fairly significant in terms of our call out right.
Like more than 10 days, but it was about 10 days in reality and we're also in the middle of taking our inventories.
And all three buildings, which added a little bit more stress, but it was a relatively short period, where we experienced some impact and we managed through it it was also.
The impact we felt beginning of January beginning to middle of.
With January primarily which is kind of absolute low point of the season, which helped as well pharma caught it happened in November I might have a different story for you, but so immaterial impact on the quarter.
Got it thanks, so much and best of luck.
Thanks, Mark Thanks.
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 everyone for participating in today's call and continued support we look forward to updating you on our first quarter results on our next earnings call stay safe. Thank you.
Okay.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
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