Q1 2022 Ollie's Bargain Outlet Holdings Inc Earnings Call
Good morning, welcome to Ollie's bargain outlet conference call to discuss financial results for the first quarter of fiscal 2022. Currently all participants are in a listen only mode.
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 Ali as a reminder, this call is being recorded on today's call from management, we have John <unk>, President and Chief Executive Officer J stars Senior.
Rice, President and Chief Financial Officer, and Eric Zander Volt Executive Vice President and Chief Operating Officer, I would now like to hand, the conference over to your host today, Jean Fontana with ICR. Please go ahead. Thank.
Thank you good morning, and welcome to Ali's first quarter of fiscal 2022 earnings Conference call. A press release covering the company's financial results was issued this morning and a copy of the press release can be found on the Investor Relations section of the Companys website I want to remind everyone that management's remarks on this call may contain forward looking statements, including but not limited to predictions.
Expectations or estimates and 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 them.
These forward looking statements, which speak only as of today and we undertake no obligation to update or revise them for any new information or future events factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K quarterly reports on Form 10-Q, as well as our earnings.
Released issued earlier today for a more detailed description of these factors.
Referring to certain non-GAAP financial measures on the call that we believe may be important for investors to assess our operating performance reconciliation of the most closely comparable GAAP financial measures. The non-GAAP financial measures are included in our earnings release with that I'll turn the call over to John .
Yeah.
Thanks, Jean and Hello, everyone. Thank you for joining our call today.
We are pleased with our first quarter sales results given that we were up against strong stimulus induced sales last year.
During the quarter sales of seasonal product were negatively impacted by cooler weather and consumers experienced pressure from significant inflation, particularly around gas and food.
We have seen meaningful improvement in our second quarter results with increased demand for warm weather seasonal products combined with our incredible deals and strong inventory position.
Currently our inventories are in terrific shape, and we continue to see compelling deals on great brands across our merchandise categories, especially those that are key to our business, including H B, a housewares lawn and garden air conditioning and pets. In addition, our Dcs are running well and goods are flowing into our stores on a timely basis, while we've not yet.
Seeing the full benefit of consumers trading down due to economic pressures, we are doubling down our efforts to offer great values as consumers continue to feel and face inflationary pressures.
Looking back at the first quarter, our comparable store sales decreased 17, 3% compared to 2021 slightly below our expectations.
This was largely due to softer performance of weather dependent categories, such as lawn and garden air conditioning pool and seasonal sports related items, we saw strength in hardware H b, a as well as pets, while we have been building our assortments.
We are even more enthusiastic with the quality and quantity of great closeout opportunities. We are currently being presented across and presented with across many of our merchandise categories. These deals will enable us to deliver great brands and even better value to our customers.
With the increasing inflationary pressure, we believe it is important for us to emphasize our extreme value proposition.
We see an opportunity to generate excitement with even more aggressive pricing. So we are planning to reinvest some of our margin back into deals for our customers.
Our store remodel program is well underway with six stores completed so far and we are pleased with the initial results. We are delivering a more compelling shopping experience through look through relocated and re space merchandize categories improved sight lines and more exciting impulse merchandising we remain on track to remodel approximately 30 stores by the end of this year.
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Moving to real estate during the first quarter, we opened nine new stores and closed one in connection with the relocation and in the quarter with 439 stores in 29 States we.
We are pleased with our new store productivity levels, which are in line with our year, one store store sales targets.
We are still expecting to open between 46 and 48, new stores in 2022, including two relocations.
We are seeing continued delays related to permitting and construction of our new stores.
We remain confident that our model can support at least 1050 stores nationwide.
Ollie's Army continued to grow reaching over $12 9 million active members growing seven 7% over the prior year and reaching 80% sales penetration in the quarter.
As part of our efforts to expand our new customer acquisition strategies in the first quarter. We began building out what we call our civilian database, enabling us to capture customer information for non Ollie's Army shoppers based on credit card information.
We plan to leverage this information to better target, our shoppers and look alikes via digital advertising as well as direct mail in the future.
During the quarter, we continued to leverage data analytics, the analytics to create more targeted marketing by adding personalization to social media, which is generating improved engagement in the second quarter, we will be testing other social media tools, including advertising on Youtube Tictoc Yelp and Pinterest.
We are also testing our influencer strategy to broaden our reach to potential new customers.
We are excited to share our 40th anniversary celebration with everyone. We have several special events planned kicking off with America's biggest cheapskate contest, which began on may 22nd and will run through July 3rd during all these days. This year. We are playing to highlight 40, great deals for our 40 years in business miles.
Stone.
Turning to operations. We are pleased with the significant progress we have made on our distribution center network and overall supply chain.
The work, we have done to build talent across the supply chain and drive efficiencies is paying off distribution center throughput is meeting expectations and import containers are being received on a timely basis to support the needs of our business.
Eric Vandal Bob will continue to lead these efforts following the recent departure of our SVP of supply chain.
In closing we are encouraged by the sales trends, we are seeing quarter to date and feel really good about our position heading into the summer season, and the remainder of 2022 that said we are operating in a highly uncertain an inflationary environment and we remain focused on what we can control.
Offering great deals at exceptional value, which we believe will be coming which will become increasingly important as inflation continues to pressure on consumers and they begin to trade down.
Our long term outlook for this business remains unchanged.
Before turning the call over to Jay I wanted to take a moment to discuss his departure, which will be in that which we announced our earnings release. This morning.
I would like to personally thank him for his partnership hard work and dedication to all of these over the past six plus years. He has been a key member of our management team and it has helped all of these grow into the company. It is today, we will miss him and wish him well in his new endeavor.
We have begun a national search for a new CFO and look forward to updating you on our progress in the meantime, I will take on the additional role of interim CFO , which is which is a position I held from 2004 until 2018.
I would like to thank our all these team members who work hard every day to make all these great. Thank you.
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 morning, everyone.
For the quarter net sales totaled $406 $7 million or 10, 1% decrease from the prior year.
Comparable store sales decreased 17, 3% in the quarter compared with the prior year.
As John mentioned, we were up against unprecedented stimulus last year, while cooler weather impacted sales of our seasonal product categories.
In the quarter, we opened nine new stores ending the period with 439 stores in 29 states at 10% year over year increase in store count.
Since the end of the first quarter, we've opened nine additional stores, including three that are having their grand opening this week.
We plan to open 46 to 48 stores this fiscal year, including two relocations.
Gross profit decreased 22, 6% to $141 3 million and gross margin decreased 560 basis points to 34, 8% compared to 44% in the same period a year ago.
The decrease in gross margin was due to increased supply chain costs, primarily the result of higher import and labor costs, partially offset by improvement in merchandise margin.
SG&A expenses as a percentage of net sales increased to 28, 6% in the first quarter of fiscal 'twenty two from 23, 1% in the first quarter of fiscal 'twenty. One the 550 basis point increase was primarily due to deleveraging as a result of lower sales.
Operating income totaled $17 1 million compared to $71 2 million in the prior year operating.
Operating margin decreased to 1100 50 basis points to four 2% due to lower gross margin and deleveraging of SG&A expenses as a result of the decline in sales.
Adjusted net income was $12 $8 million and adjusted diluted earnings per share was <unk> 20.
Adjusted EBITDA was $26 $2 million and adjusted EBITDA margin decreased to 100 basis points to six 5% for the quarter.
Capital expenditures totaled $9 $7 million, primarily for new and existing stores. This compares with $9 $5 million in the prior year.
Inventories increased 45, 6% to $517 million in the first quarter compared with $355 $2 million a year ago Approx.
Approximately one third of the variance was attributable to increased supply chain costs and the remainder driven by the increased number of stores and the timing of merchandise receipts. In addition inventories ended up at the end of the first quarter of fiscal 'twenty, one were lower due to heightened levels of sales productivity from increased consumer spending associated with stimulus.
At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $205 $5 million in cash.
Subsequent to quarter end, we've invested $10 million to repurchase shares of our common stock.
Now I will discuss our outlook for fiscal 'twenty two our revised sales guidance reflects our first quarter results a delay in the opening of some of our new stores to later in the year as well as a slightly more measured outlook for the second half.
In addition, we are moderating our gross margin outlook to reflect a continued shift in merchandise mix and the potential to reinvest in price as we lean into great deals for our customers.
For the full year, we now expect total net sales of $1 87 to $1 $9 billion comp store sales of negative two to flat.
The opening of 46 to 48, new stores, including two relocations, we expect to open approximately 10 stores in the second COVID-19 in the third quarter and between eight and 10 stores in the fourth quarter.
Full year gross margin of approximately 36, 5% to 36, 7%.
Operating income of between $155 million to a $168 million.
Adjusted net income of between $115 million to a $125 million and adjusted net income per diluted share of $1 83 to $1 98.
Both of which exclude 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, 5%, 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 to $50 related to new stores store level initiatives, Our York DC expansion and it projects.
For the second quarter, we expect total sales of approximately $450 million to $460 million. This reflects a recovery of some of the sales and seasonal items in the second quarter.
Comp store sales of between flat to up 3% gross margin of approximately 34, 5% consistent with our prior expectations.
Operating income of 27 million to $30 million and adjusted net income of between 20 million and $22 million and adjusted net income per diluted share of <unk> 32 to 35, both of which exclude excess tax benefits related to stock based compensation and.
In this highly inflationary environment, we believe that price becomes increasingly important we remain focused on offering compelling values to our customers each and everyday and believe we are well positioned to benefit as consumers dollars continued to be stretch further and they trade down to hours and.
In closing I would like to thank John and Eric and the entire AOI team for their support I am proud of all that we've accomplished during my time here.
I remain confident in the growth opportunities that lie ahead for this unique business model and I'm, leaving the company with a strong management team.
I will turn the call back to the operator to start the Q&A session operator.
Thank you. Thank you have a question at this time. Please press Star then one on your Touchtone telephone. If your question has been answered or you wish to remove yourself from the queue. Please press the pound key.
And our first question comes from the line of Jason Haas with Bank of America. Your line is open. Please go ahead.
Hey, good morning, and thanks for taking my questions.
John I was curious you could provide some more color on what youre seeing in regards to the closeout opportunities that are out there.
Categories, you're seeing the most opportunity in.
Have you provided any color on what sort of sources, where theyre coming from these days that would be helpful. Thank you.
Yeah, Jason we I would never divulge who were getting the product from that is not what we do but obviously you've been in the stores a lot and you know we <unk>.
Source, a lot of times, but with regards to the other flow, it's it's getting pretty general and almost all of our categories. We're seeing an outsized.
Slow right now in the HBA categories in the houseware categories, but we're starting to see some some goods pop in sporting goods.
Starting to push pretty good we're seeing some some good flow in the food category.
Starting to see them some in bed and Bath, where domestics area lawn and garden has been some special categories. This year, so far so starting to see some breakthrough in the toys. So we're starting to see it everywhere.
I think thats not a surprise to anybody probably on the call that things are changing in the marketplace and we're starting to see some some pretty large opportunities for us and our customers.
Thanks, that's great to hear and then as a follow up question. I know you had mentioned trade down I think you had said youre not seeing the full benefit yet. So I'm curious are you starting to see any evidence that customers are starting to trade down into your channel or.
Not seeing it yet and there should be a full benefit to come.
I think Jason it's hard to tell what that that perspective, but I do think we're seeing a little bit but I don't think we're not seeing what we would expect to see yet I think there's still more to come.
Theres probably another.
And sometimes we're ahead of it too far but probably another three to three months to six months before we see the full benefit come through.
Thanks, that's great to hear and just wanted to say Jay out it's been a pleasure working with you and I wanted to wish you. The best of luck your next opportunity.
Thank you Jason appreciate it same to you.
Thank you and our next question comes from the line of Peter Keith with Piper Sandler. Your line is open. Please go ahead.
Hey, good morning, everyone. Thanks for taking the question.
So John I guess, it sounds like the closeouts or getting better maybe three to six months to get trade down but at the same time. It sounds like you guys are taking a more cautious view on the back half of the year.
Could you just kind of frame up what youre seeing right now that that results in net debt lower second half comp outlook.
Yes, I think Peter just something we want to be conservative in how we manage the business. We don't want get ahead of ourselves. So rather chase. It then be too far ahead of our skis and then have an issue with the inventory that we would not be able to get rid of so.
We're just taking it take it easy and we're going to push one when the time comes to push and push hard so.
The opportunities are out there to be had and our merchants will be patient and we will be able to to close on the deals when it's time.
Okay and.
As you're probably seeing out there there is quite a bit of promotion and mark down activity across retail is a lot of retailers are are over inventoried, obviously that it's going to create closeouts for you, but what is the competitive landscape right now for you just competing against this this highly promotional environment.
Yeah, Peter we watch it each and every day and our merchants have been looking at what the big box retailers have been doing with some of their price reductions to try to move some of that inventory out and everything we will have to look at as far as either a noncompetitive issue that we don't have the same product that they're moving through or are we still have.
As a nice value proposition compared to what there is the reduced prices in anyway. So we're not finding any problems with our current pricing, but as we always say we will be the low price leader. If there's someone who has the same item that we do and they're beating us on price. We will we will take the mark down accordingly, but we're not seeing that yet.
Okay. It sounds good thanks, good luck and Jay I wish you nothing but the best.
Thanks, Peter I appreciate it.
Thank you and our next question comes from the line of Mark Carden with UBS. Your line is open. Please go ahead.
Good morning, and thanks, a lot for taking my questions to start another one in consumer behavior are you guys seeing any notable traffic or ticket shifts between your ollie's Army and non Ollie's Army shoppers.
With regards to the ticket or the basket. We've always have seen a notable difference between the ollie's Army shopper and the non Ollie's Army shopper I think to spend is about 40% greater for the Ollie's Army shopper versus the non Ollie's Army shopper.
Consistent.
What we know in terms of number of visits and transactions for the non Ollie's Army shopper. We don't know that we don't know who they are so we couldnt. We couldnt have said when we know the spend for the Ollie's Army shopper is much much stronger.
Great and then just in terms of the supply chain, where would you guys say the biggest unanticipated pinpoints are today and how do they compare with what you are anticipating at this point last quarter.
This is mark.
I'll answer the.
I don't think we have an unanticipated.
Pain point at this point in time.
We do have.
Challenges that we continue to face, but our throughput is where we needed to be to serve the business in all three distribution centers and we have the import.
Transportation International transportation capacity to.
Ensure goods flow and that we can properly support our business, especially our seasonal businesses business, which was problematic last year.
Our last kind of remaining challenge of any consequences getting our Texas building to be more efficient throughput, where we needed to be with efficiencies and opportunity.
Great. That's helpful. Thanks, so much and best of luck Jay.
Thank you.
Yes.
Thank you and our next question comes from the line of Edward Kelly with Wells Fargo. Your line is open. Please go ahead.
Yeah, Hi, guys good morning.
I wanted to ask you about inventory. So there has been some talk this morning about inventory up a lot year over year, but inventory per store versus 2019 is only up about maybe 16% or so and you're guiding comps up probably mid singles from there.
How are you thinking about.
Your inventory level overall, how much of the of the increase here is you know just sort of amortize supply chain costs. How are you feeling about.
You know like unit volumes of inventory and does this impact your ability at all to go after the closeout opportunity that's ahead.
And this is Jay and I'll start on this.
We feel good about our inventory levels to your point, a large chunk of that increase is the increased supply chain costs and when we look at 19.
We're in good shape from.
From an inventory level standpoint, obviously, you had a little bit of a shift in sales from from Q1 to Q2, we expect the sales going forward in Q2, Q3 Q4 to be strong and we would expect.
The inventory levels overall to kind of normalize.
No really closer to the end of Q4.
Sequentially step down between then and now, but we feel fine where we're at.
And to add a little color on that with regards to the and obviously, it's hard for you guys to see from our financial statements what the in store inventory is versus what's in the D C and what the capitalized costs are.
Compared to 19, we are.
We're almost right about in line on an inventory per store.
In the actual comp stores looking 19% to 22 not adjusting for inflation. So I don't think we are sitting heavy at all in the stores. When you adjust for the price changes that have occurred with the inflationary pressure, we've seen and I think there's still opportunity for us, but I think we will get when you wont see such a large disparity to <unk>.
'twenty one as we can move through the year as Jay had mentioned.
Okay, and then just a follow up and is this for you I think Jon but yes.
I'm interested in sort of open to buy and how youre thinking about positioning yourself for the opportunity. That's ahead right. I mean, we're hearing large retailers now canceling orders clearly.
Clearly it seems like.
There's going to be some very big opportunity from a deal flow perspective.
But how do you think about running the business from an open to buy standpoint, because obviously like an art component of that.
How do you feel about taking risk where it's appropriate.
Leaning into the opportunity and do you have the capacity to do all of that.
Yes, I think I think the big thing is when we go back to is the concept of dry powder and thats, our merchants being very patient.
And confident that the deals are going to come and make sure. They wait for the absolute a plus plus deals.
And we are.
Severely focus on that today and every merchant has been.
Spoken to and they are fully aware of how this is going to work in the back half of the year. So we base, our keeping dry powder keeping nimble.
And being very selective on what we're going to buy and being aggressive on our offers because the the main key from our perspective is we have to give the consumer a great value and that also assists in the trade down effect is if I give some somewhat of compelling value. They can't they can't resist theyre going to come to the store.
Save money. So that's why that's where we're at in our piece of the puzzle but to your point the.
The open to buy is very fluid at ollie's and always has been there is a lot of art more than science here. The way we operate the business, but we do have our parameters. We do have the ability to collapse on deals that we believe are home runs and have the ability to hold them in the Dcs and we are nimble. So we will not pass on the deal if it.
If it's what I'd call gold.
And we are we are working accordingly, so the merchants are pushing hard on their open to buy but we're not going to get over our skis and as you know Ed followed us for many years, we are not fast fashion, where we're end of life in this cycle for a lot of items. So theres not a lot of risk with what we're buying we're buying general merchandize hard goods that are not fashion, driven and where are you buying.
Last year's model, so that that plays into it plays into how we operate.
Great. Thank you and good luck Jay.
Thanks, Ed.
Thank you and our next question comes from the line of Kate Mcshane.
Michelle Mcshane with Goldman Sachs. Your line is open. Please go ahead.
Hi, Thanks for taking our questions.
Just to round out the last question, we just wondered if you could.
Closeouts are still going to represent about 70% of sales for the year or could it maybe being more given the circumstances going into the back half.
Well Kate I would always answered this question with Mark in the past, we'd love Closeouts would be 100%.
But we know that's not possible his history would tell you Kate it's about 70% if.
If we got to 75 that would be a big big move.
But we are pushing very hard we are definitely favoring domestically sourced product versus imports. So the buyers are working diligently on that so the more closeouts. We can find domestically that would be great, but there are going to be closeouts, what we call stock lots in Asia as well from a lot of the council. There. So when you would make it here yet from the other retailers have.
Cancel them out those will become closeouts as well so wherever the closeouts located we're going and we're going to go after and go after it hard. So we we've always run the business that the closeouts or first and then everyday value goes or second so we will mix that in accordingly.
Okay. Thank you and then.
Question was just about how traffic trended through the quarter are you able to walk us through the cadence by month and how that may be improved.
Okay.
Yes, Kate this is James and we don't get in to inter quarter trends.
But I can say our comp was a negative $17 three in the first quarter, obviously going up against the stimulus about 90% of that was driven by a decrease in transactions.
<unk> was a slight decrease of 10% and average basket and that was really driven by AUR with some of that is driven by the shift of those higher ticket items.
All items out of Q1.
And then the trends so far and we're not going to get specific but they have improved materially really across all fronts.
So we're seeing as the weather has cooperated the trends on both transaction and average basket are getting stronger and we're comfortable with our guidance for the first quarter.
I'm sorry in the second quarter of flat to a Basel III.
Okay. Thank you and best wishes Jay.
Thank you very much.
Thank you and our next question comes from the line of Simon Gutman with.
Morgan Stanley . Your line is open. Please go ahead.
Hey, everyone, it's Simeon Gutman.
You mentioned, we're not seeing the trade down yet can you give us a bit.
Clearer picture of what the buildup looks like whether it's traffic ticket.
Items in the basket.
What are what is the buildup mean and why are you signaling that we're getting to that point.
Simeon obviously this this is part of the art of the business, it's not the science here to be able to know exactly when that's happening there the reality is.
We will all know when the trade down effect is really gotten to full force, but as our comps will start driving on an outsized basis as they have historically, so I view that to come.
Here in the next several months, but with regards to actually knowing.
Where it's coming from and how it's too early for me to tell you that.
I think I forecast this probably before anybody else did last year that something was coming and we are seeing pressures there were narrow and starting to see it now we just saw it earlier and I think we'll see the benefits earlier as well so I think we're moving moving towards that.
It's just strictly math.
Consumers only have so much disposable income in every single week to put more gas in the car and they go to the grocery store they have less disposable income and they start to feel the pressure.
Regardless of who you are so that that I believe is coming and most importantly, where we're the the compelling deals and the opportunities for us to give them a price. They cant resist I think is right around the corner.
Okay fair enough.
A follow up and maybe two parts first back to inventory.
The dollars are up a lot Ed mentioned not as much on a per store basis.
Can you talk about why this and.
That means you're going to have higher costs, and you're probably going to raise price.
And another I guess.
Going back to the inventory question why isn't there a risk or for elevated markdown risks for the rest of the year and the second part of the question is.
The acceleration in the stacks on a three year basis, which adjust out for stimulus is pretty significant going from Q1 to Q2.
What is driving that.
Sequentially.
So that was a that was a lot more than two questions.
The amount that was a bolt on.
I can address a couple of those things I mean.
I think on the cost piece right, we've talked about those increased supply chain and import costs those are.
Even during Q1 the cost came in line, we had a little headwind on margin just because they deleverage because of the sales drop but look going forward.
And we've given guidance on the margin those costs are baked in to.
Our gross margin estimates. So we think we're in good shape there to your point on a markdown risk I mean, we feel we feel good with our inventory I review the aging in detail.
Every quarter, we don't have any age problem.
Look if the environment, we don't know what's going to happen with the promotional environment in the next coming months.
But we have our standard cadence of promotions with all these days and other clearance events. So.
So we don't expect there to be significant markdown risk.
Going forward and then as far as the comps.
To your point and again, we're kind of the way we look at it is a three year geometric stack basis, I mean, we're starting to anniversary of that a little bit and talk about comps and a normal in a normal way with the zero to three for for Q2 and then.
Higher than that like we've talked about on the last call for the back half in Q3 and Q4.
Mid single digits.
And we had an inherent acceleration built in when we gave the guidance last time and now this time, we do forecast a slight incremental uptick in Q2 because of the shift of the seasonal sales out of Q1 into Q2.
And then.
We've actually tempered our back half forecast by about a point, but generally speaking I would say we have the.
Seasonal shift into Q2, we have a better overall inventory position as we go through Q2 and Q3.
And even Q4 for that matter and if you recall last year. We did have some timing delays of shipment of key categories seasonal Canada <unk>, both late in Q3 and in Q4. So that's.
We just think that in coupled with the deal flow and what we're seeing we think we're very well positioned to drive these sales and we don't think it's overly aggressive.
The remainder of the year.
Okay. Thank you both good luck Jay.
Thank you.
Thank you and our next question comes from the line of Matthew Boss with.
J P. Morgan Your line is open. Please go ahead great.
Great. Thanks, So Jon maybe at the category level could you just elaborate a little on topline performance in May.
Where have you seen that sequential improvement exactly and then just how are you thinking about June and July comps relative to may and that second quarter outlook and then maybe just on <unk> question. If were thinking about your core customer. They are clearly under increased pressure relative to pre pandemic your stores or a destination given the higher <unk>.
Gas prices.
What's giving you this confidence in the back half for mid single digit comps or a referral or a full return to algorithm.
Yeah, I think Matt the the biggest part is the the trade down effect, that's definitely going to play into our hand, the core customer.
Our core customers not on a fixed income side, that's a misnomer, where our average household income is about $55000. So it's not somebody who's at the poverty level or that.
That strap that they can't do anything so there is a portion of them without a doubt.
I think all of us have in the portfolio, but we have a wide range of customers that we deal with but there is there's a big piece that are out there that and we've seen it historically when people get strap the trade down effect comes to us and there are a lot of it's based on the deal flow, we're able to get in the the ability to motivate the consumer to come in the building. We believe that that's on its way I think everyone everyone's home.
Where that the retailers are having some struggles right now and when to retailers struggle that that is the ability for us to see some great product in and give a great value to the consumer so that piece I feel pretty good with I don't know the timing, but we will know the time when it happens and then we'll see the results and we'll be able to deliver so that'd be some comfortable what what was your other question, Matt Matt on the.
Cadence of the comps in the quarter.
It's pretty consistent by month, not a whole lot of difference between those three.
Okay, Great and then Jay just on the gross margin as a follow up so if we think about the first quarter what accounted for I think it was about 100 basis points myths versus forecast.
And then could you just walk through distribution versus merch margin as we're thinking about the second quarter and what now are you embedding for the year on the distribution headwinds.
Yeah, So Matt.
To your point, we were about 100 100.
Basis points off forecast about 60% of that.
It was driven on the merch margin side. So we we did have a 130 basis point improvement in our merch margin year over year, but we had forecasted even more and then on the supply chain side, we had a headwind but that was really as I said attributable.
Primarily to just deleveraging those costs on the sales we didn't have a miss from a from a dollar standpoint, we're right in line so looking forward.
We haven't really changed our forecast on the supply chain side of things I mean, obviously, it's going to be elevated.
Year over year, just like it has been.
And the way, we think about it is that in the first quarter year over year is about net 560 basis point degradation in margin.
We would expect that in Q2.
Hi.
We've given you that guide.
Year over year, it probably gets better by about 90 to 100 basis points Q3, then becomes about half of that.
From a year over year headwind and then finally as we've talked about.
In Q4, we get back to much more normal we're expecting to be about 39, maybe.
Maybe a little haircut from where we were on the last call, but not significantly different in really Q4 is when we expect to kind of normalize across the board and get closer to the long term algorithm.
Matt just to add a comment there.
Supply chain.
Expense improvement is primarily driven by better container cost for imports.
Moving forward under our new contracts.
Great Best of luck.
Thanks, Matt.
Thank you and our next question comes from the line of Poly Jewish with Citi. Your line is open. Please go ahead.
Hey, Thanks, guys I'm curious from inventory or are there any categories that you have large increases above and beyond.
You'd like right now I'm curious also if you have any.
We feel like the availability is not as good as as you would hope and then second just.
So I understand on the SG&A line.
<unk> results were to come in.
Any any different than planned.
Much flexibility do you feel that you have on the SG&A line, given some of the inflationary pressures out there.
Yeah, Paul with regards to the inventory I would tell you we don't have any pockets of over inventory position that we're concerned with.
As a company right now there is there is no no lawyers, we think theres risk today.
With regards to areas of that we'd like to see more flow I'd say, the one one and only area that today still exists, it's getting a little bit better, but it's not where we'd like to see it would probably be in the packaged food category, there's still not a lot of breakthrough there yet and I'm not sure how much it will come but we've seen a little bit of a <unk>.
<unk> in the last several weeks.
But we're still getting our fair share, but we'd like to get more of it but are there other than that we're seeing great flow and we don't think theres any any risk of what we're carrying right now.
And Paul this is Jay on the SG&A side.
I would tell you we run pretty lean already obviously paint.
Payroll wouldn't be the lever, we would look to pull and that's our biggest impact on.
On the expenses if sales are softer than what we're forecasting we would attempt to recover so some portion of that in payroll, we can't obviously get it all back.
Sure.
Otherwise, yeah, I think we run pretty lean and we are seeing some cost pressures on.
Our advertising from a print standpoint, the cost of printing has gone up and then also utilities are significantly up year over year. So we've got those things embedded into our model and it's not huge dollars, but adding a little bit of headwind.
So I think you know.
That's how I would answer that.
Got it. Thank you good luck.
Thanks, Paul.
Thank you and our next question comes from the line of Scot Ciccarelli with Trust. Your line is open. Please go ahead.
Hey, Good morning. This is Josh on for Scott a question is on the Remodels and you guys provide any more detail on the costs there and maybe any early results youre seeing in terms of accomplished from those stores.
Sure Josh This is Eric I'll take the question.
We're not going to go into the specifics on comp lifts.
It's only six stores so keep that in mind that we completed one track to complete 30 stores.
And.
The six stores are in line with our expectations meeting our expectations and our expectations are.
An average investment of 125000 will get a return in two years or less.
And those six stores are meeting that expectation.
So we're going to continue to move forward.
It reads customer feedback and results an update again in the quarter.
Got it thank you.
Thanks, Josh Thanks, Josh.
Thank you and our next question comes from the line of Jeremy Hamblin with Craig Hallum. Your line is open. Please go ahead.
Thanks for taking the questions I want to come back to the gross margins for a second.
The guidance change about 60 basis points, you noted a couple of factors in that supply chain.
Still a little bit worse than expected, but also.
Mix shift I think was called out could you quantify the split between those two and the 60 basis point change for the year.
And which you know, which particular product categories.
In that negative mix shift that would be driving that downside.
And Jeremy this is Jay and I can start to address that.
For our internal model, we had about a 50 50 basis point.
Change and so part of that to your point is absorbing actualizing Q1.
And then the mix the mix component that we're estimating going forward and I would say, it's about half and half between those two components.
There's also a little deleveraging on the sales given that we took down in the back half.
But that's probably 10 basis points on it.
And then going forward, obviously and John are Eric might speak to this as well.
But we're seeing.
Strong sales trends in the consumables.
So that's putting pressure on the mix and at the same time right. It's the other side of the equation some of the products the categories.
That arent moving as strong that we would typically.
Have a higher margin on whether that whether that books are domestics.
Eventually all of that will shake out.
And part of our margin guidance is to focus on making sure that we provide value to the consumer at this point in this environment, we think that that's critical.
Got it that's helpful.
Then just on a go forward basis, so it sounds like by Q4.
Feeling pretty good that youre going to be back to 39% or maybe slightly better than that.
More normalized margins, if we can take your crystal ball and look ahead, a little bit.
There's obviously a lot of noise supply chain.
And so forth, but in terms of thinking about 'twenty, three and Youre now seeing your normalized.
Sales levels that have gotten back about 2019 levels.
From a gross margin standpoint is there anything that you see now that youre seeing better throughput.
Improvement in deal flow.
Presumably maybe a more normalized return on the product mix.
Where your gross margins wouldn't be returning to what your typical levels would be in that kind of 39, and a half of 40% for the full year.
Jeremy This is John I would I would tell you for 2023 I feel pretty confident.
That we would see a normalized gross margin rolling out as early as Q1, I don't I don't foresee.
Too much pressures in 2023, once we annualize the heavy load we're carrying right now with the the important cost and whatnot and increased supply chain. So I think you start to see the benefit in Q4, and I think we'll be back to pretty much normalized levels in Q1.
Full year 2023.
Great. Thanks for taking the questions best wishes Jeff.
Thank you.
Thank you and our next question comes from the line of Randy <unk> with Jefferies. Your line is open. Please go ahead.
Yeah. Thanks, guys how are you.
There was mentioned before earlier on the call.
Around container rates, improving can you just expand upon that a little bit and give us some perspective on how much improvement you've seen in one of those improvements start to take hold I guess in the contracted rates.
Sure.
The most of our contracts Randy start.
<unk> yeah.
And so we begin to incur the benefit of those contracts when they when they sale, which is starting in June . So we're kind of right on top of the beginning too.
Realize some of the savings when.
When you look at last year.
We hit peak.
Import.
Rates around kind of the peak of the market starting in August into September October .
It really didnt stop at some of the.
The absolute peak spark spot market rates.
We're right at that September October timeframe.
So we're up against rates when you hit when we hit peak versus contract were approximately 50% less.
On contract versus some of the peak spot rates, we were paying.
I'm not going to get into too many specifics on our contract rates.
But also know that.
We've lost some flexibility to leverage spot market as you move into the back half of the year.
With at least some expectation that spot market rates could be.
Favorable.
This year.
Super Helpful. And then I guess the press release also talked about higher wages in select markets was the exact quote. So can you give us maybe an update on labor market labor wage increases are we starting to see that start to peak out.
Areas, just kind of what's the outlook there for wages and so on and so forth.
Yes, I think Randy from a wage perspective as well, we've always said, we adjust wages market by market by market. So whenever we see especially going into new market. We adjust according to what other retailers are paying for an existing market and we start to see pressures with hiring we will adjust accordingly.
<unk> seen a ton of change in the existing market that were in existing markets. We're in today new markets. We're working through as we go through them.
The D C said knock on wood have been pretty stable.
But when I say that it could change tomorrow, so I don't.
I don't hang my hat on the DC wages is that world is evolving each and every day. So we watch it but we've been pretty steady for a while so.
Just leave it at that and if we have adjustments we need to make we will make them accordingly to keep the supply chain stable business more costly not to have people working then.
And not so we feel pretty good wistful pretty good where we're sitting.
And I think things are changing in the world. So we will see where it goes but we're going to continue to be competitive.
To get the workers and be able to run the model properly.
I guess last quick last thing to just ask is I guess for Jay is when you then kind of think about what we just talked about where it sounds like there is more visibility in the in the freight costs.
Loosen loosen the flexibility or.
On the spot market, but you have more visibility and it sounds like there's more stabilization around labor and wages.
I guess, what I'm trying to ask is it does there is there more kind of a clearer picture in kind of being able to make that annual guide.
At this point of the year versus maybe what you kind of guided you obviously at the beginning of the year, there's just more visibility towards the model is that fair.
Yes, I think on the supply chain side of things I think that's a fair comment I think on the store labor front.
We have visibility to that too is a dynamic market and obviously, we still have a big bogey.
Or are we talking about on every call, but if we had to adjust wages like 15, an hour across the board, which we would never do that that's a big nut.
See I agree with you Randy I would say that.
The component a couple of components that come to my mind that are maybe a little more uncertain.
It would be.
<unk> fuel diesel fuel rates, obviously, we've done our forecast and we're doing our best but that's a volatile market.
And then I think the you know.
What we've already talked about on the merchandize mix side.
And how.
How how that plays out in the future on what consumers are buying and what we do to lean in on premise.
Great. Thanks, guys.
Thank you thanks Randy.
Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Jon Springer for any further regard.
Thank you everyone for your participation in today's call and continued support and we look forward to updating you on our second quarter results on our next earnings call stay safe. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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