Q2 2022 Ollie's Bargain Outlet Holdings Inc Earnings Call
Okay.
Good morning, welcome to the Ollie's bargain outlet conference call to discuss the financial results for the second quarter fiscal year 2022. Currently all participants are in a listen only mode. Later, we will conduct a question and answer session and interactive instructions will follow at that time. Please be advised that this call is being recorded and the reproduction of this call in whole or.
Part is not permitted without expressed written authorization of ollie's.
Joining us joining us on the call today from Barclays Management, Our Johnson Chief that's about it.
And interim Chief Financial Officer, and Executive Vice President and Chief Operating Officer, I will now turn the conference over to your host Lyn Walther with ICR. Please go ahead.
Thank you good afternoon.
You're welcome.
Thank you.
Please note that this call is being recorded a press release covering the company's financial results was issued this morning and a copy of.
That release can be found in the Investor Relations section.
I would like to remind everyone that matters.
Great.
On this call may contain forward.
These statements, which may include but are not limited to predictions.
Jason.
Yes.
These statements are subject to.
I'm sorry.
Factors that could cause.
Actual results to differ materially.
With respect to our future.
Yes.
Great.
Within the meaning of the private.
Litigation Reform Act.
You should not place undue reliance on these forward looking statements, which speak only as of today.
Take no obligation to update or revise them for any new information.
Yeah.
Certain factors that may affect forward looking statements may not be enough.
Our control and are discussed in.
Sure.
We encourage.
Including our annual report on Form 10-K.
Our quarterly reports on Form 10-Q as well.
We issued earlier today.
We will be referring to.
Certain non-GAAP financial measures.
May be a meaningful measure for investors.
Great.
Reconciliation of the most closely comparable GAAP financial measure to the non-GAAP financial measures are available in our earnings.
Okay.
I will now turn the call over to our President and CEO .
John .
Thanks, Lynn and Hello, everyone. Thank you for joining our call today.
I will begin by discussing our second quarter performance and highlights then turn the call over to Eric Once Eric. It's finished I'll review, our financial results for the quarter and outlook.
Our second quarter results reflect meaningful improvement in our sales trends against a challenging dynamic economic backdrop for the quarter, we generated a one 2% comparable store sales increase compared to 2021 in line with our expectations we.
We experienced strong sales in lawn and garden health and beauty AIDS hardware automotive and food.
We celebrated our 14th year birthday, this quarter and in honor of this milestone we offered 40 special deals to our customers during our annual all these days event this year.
We were pleased with our results during the all these days as customers responded to our great deals.
We continue to focus on providing real brands at real bargain prices for our customers. During these inflationary times, we are committed to offering great deals and I believe we are well positioned to win.
During the quarter, we reinvested back into price to drive a stronger value proposition, which impacted our gross margin.
We experienced a slight shift in product mix to more consumable products, which carry a lower margin profile.
Inventory position at the end of the quarter was right on plan and we believe we are well positioned for the second half of the year.
Closeout market continues to be very favorable with an abundance of deals there is never a shortage of deals in the market, but today, we're seeing opportunities like we've not seen for a long time.
Canceled orders excess inventory and supply chain disruptions have led to a broad assortment of products being available in the market.
This type of environment is what we're built for and our merchants have the know how to get the deals for our customers.
Based on the merchandise pipeline and the value we can offer to our customers combined with the easing of supply chain expenses sooner than we originally planned we expect gross margins to improve materially in the back half of the year.
While we are excited about the opportunities ahead of us we recognize that the consumer facing several headwinds caused by inflation, especially higher gas and food prices.
We are encouraged that we are starting to see signs of consumers trading down to Ali's as they look for value to offset inflationary pressures.
We believe that the amazing deals we have to offer in the back half of the year will be too good to pass up and will drive consumers to our stores now.
Now I'll turn the call over to Eric.
Thank you John .
I would like to start by thanking the entire ollie's team for their hard work and commitment to serving our customers and supporting each other you are appreciate it.
I will share an update on real estate, our store remodel program Ollie's Army and our supply chain.
During the second quarter, we opened 11, new stores and closed one ending the quarter with 449 stores in 29 states.
We are pleased with the performance of our new stores.
We have 50 leases executed for 2022, we continue to experience delays in permitting and construction and now expect several of the stores planned for fiscal 2022 to open in fiscal 2023.
Based on this we plan to open between 41, and 43 stores last two relocations and one closure in fiscal 2022.
We are working to mitigate these challenges and intend to return to our long term cadence in fiscal 2023.
In terms of Remodels, we are in the test and learn phase of the program. We have completed eight remodels and are pleased with the initial results. We remain on track to remodel approximately 30 stores by the end of the year.
Turning to our customer loyalty program Ollie's Army grew 6% to $12 9 million active members, reaching over 80% sales penetration.
These army remains an important sales driver and we appreciate our most loyal customers.
We continue to collect data to build our civilian database for non Ollie's Army shoppers.
Although it is still early we are encouraged by the opportunity to connect with these customers through our various marketing channels and convert them to the Ollie's Army.
During the quarter, we held several events to celebrate our 40th anniversary. We received thousands of applications from people looking to be crowd America's biggest cheapskate.
We recently announced the winner who in addition to bragging rights one $4040.
Work is well underway for our next milestone event, which could put ollie's and again its book of World Records stay tuned for more details.
Turning to our supply chain, we have made significant improvements to our supply chain over the past year distribution throughput at our transportation infrastructure are positioned well to service our business through the peak holiday season.
We also continued to experience improvement in transportation costs.
To support our growth we are finalizing plans to open our fourth distribution center in the Midwest in 2024.
We also plan to complete the expansion of our York, Pennsylvania D. C next year.
With the addition of our new facility and the expansion of our York facility, Our DC network, we'll be able to support growth to over 700 stores.
I will now turn the call back over to John to discuss our financials.
For the quarter net sales totaled $452 $5 million, an increase of eight 8% from the prior year comparable store sales increased one 2% in the quarter compared to last year.
In the quarter, we opened 11, new stores and closed one store ending with 449 stores in 29 states a nine 8% year over year increase in store count.
Since the end of the second quarter, we opened three additional stores.
Gross profit decreased 11, 9% to $143 6 million and gross margin decreased 750 basis points to 31, 7% compared to 39, 2% in the same period a year ago.
The decrease in gross margin was primarily due to increased supply chain cost. The result of higher import transportation and labor cost.
And slightly lower merchandise margin related to a shift in product mix and investment into price to maintain our extreme value proposition.
SG&A expenses as a percent of net sales decreased to 26, 2% compared to 26, 5% in the prior year to 30 basis point decrease was primarily primarily due to leverage in payroll from lower bonus accrual as well as continued tight expense controls.
Operating income totaled $16 $5 million compared to $45 7 million in the prior year operating margin decreased 730 basis points to three 7% due to lower gross margin, partially offset by continued tight expense control in SG&A.
Adjusted net income was $13 $7 million and adjusted diluted earnings per share was 22.
Adjusted EBITDA was $25 $9 million and adjusted EBITDA margin decreased 730 basis points to five 7% for the quarter.
Capital expenditures totaled $14 million, primarily for new and existing stores and the expansion of the York distribution Center. This compares with $8 2 million in the prior year.
Inventory inventories increased 32, 3% to $494 $1 million in the quarter compared to $373 million six $373 $6 million a year ago, approximately one quarter of the variances related to increased supply chain cost and the remainder driven by increased number of stores and the timing of merchant.
Nice receipts. In addition inventories at the end of the second quarter of fiscal 2021 were lower than our historical levels.
At the end of the period, we had no outstanding borrowings under our $100 million revolving credit facility and $218 million in cash.
During the quarter, we invested $10 million to repurchase shares of our common stock.
Now I will discuss our outlook for fiscal 2022.
For the full year, we now expect.
Total net sales of $1 843 billion to $1 86 1 billion.
<unk> store sales.
Negative two 5% to negative one 5%.
The opening of 41 to 43, new stores less two relocations and one closure.
We expect to open approximately 17, new stores in the third quarter and between 4% to six in the fourth quarter.
Full year gross margin of approximately 36, 4% to 36, 6%.
Operating income of between $145 million to a $150 million.
Adjusted net income between $109 5 million and $113 million.
And adjusted net income per diluted share of $1 74 to $1 79.
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.
And annual effective tax rate of 24, 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 million to $58 million related to new stores, Our York distribution center expansion costs related to our fourth distribution center store level initiatives and projects.
For the third quarter, we expect.
Total net sales of approximately $426 million to $434 million.
Comp store sales between three and a half and five 5%.
Gross margin of approximately 39, 4% to 39, 6%.
Operating income of $33 million to $36 million.
And adjusted net income between $24 $5 million and $26 8 million and adjusted net income per diluted share of 39% to 43.
Both of which exclude excess tax benefits related to stock based compensation.
In closing I would like to thank the entire ollie's team for their hard work and dedication.
We appreciate all that you have done to serve our communities and offer an amazing experience to our customers.
As we say we are ollie's.
I'll now turn the call back to the operator to start the Q&A session operator.
Ladies and gentlemen, if you have a question or a comment at this time press star one on your Touchtone telephone, we will pause for a moment, while we compile our Q&A roster.
All right.
Our first question comes from Peter Keith with Piper Sandler Your line is open.
Hey, Thanks, good morning, everyone.
I wanted to hit on the gross margin for the second quarter. So it did come in nearly 300 basis points lower than the guidance.
You commented that merchandize margin was just slightly down but what was the I guess the bid the big Delta from the guidance. It certainly seems like a pretty big Miss.
A short period of time with the quarter.
Yeah, Peter the merchandise margin was slightly down compared to Q2 of 2021.
Merchandise margin compared to our expectations most of the the Miss that we had from the street expectations was predominantly.
Sitting in the end the overall merchandise margin we had probably.
Two thirds of the Miss was in the <unk>.
The merch margin and one third in the supply chain piece.
Okay.
And I wanted to pivot over to the.
The closeout environment.
So certainly makes sense that closeout availability is getting better I guess I wanted to think about it from both on availability versus a pricing standpoint.
As we think about your stores in the back half years theyre going to be a lot of newness that we should be looking for with closeouts or is it more a function of similar product, but but much sharper pricing.
Based on the deals that are out there.
I would say Peter you should see a lot of newness.
The deals that we are the true closeout. So we're getting our hands on it is going to be it's going to be new item, a new product and right now we are.
Starting in the third quarter were actually get navigate pretty well here and seen a lot of strong deals come our way. So I would say you're going to see a lot of a lot of new product and right now we're able to give the consumer great price and we're very confident in where we're sitting with our margin for the year.
Q3 numbers, we give it out.
Okay. Thank you very much good luck.
Thanks Peter.
One moment for our next question.
Our next question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Hi, good morning, Thanks for taking my question.
John with some of the moving parts here between gross margin.
<unk> and the timing of stores I was hoping we could just talk a little bit more explicitly about how your back half guidance is different today versus versus last quarter and if there's been any change in how youre thinking about.
Same store sales and how youre thinking about.
Some of the gross margin.
We go through the next few quarters. Thanks.
Brad most of the change were expecting is coming into Q3 out of Q2, there was a timing of when we're able to secure some higher margin deals that were out there in the marketplace. So we just didn't get them done in Q2, and they've actually come through so far in Q3 and we're seeing.
The deal flow actually pick up pace and we feel.
Pretty comfortable where we are guiding to in Q3 Q4 has not really changed from where we were before we were just experienced some timing of hitting the deals. So in Q2 to Q2 and Q3 came in new store timing as Eric had mentioned, that's just a function of the permitting process has been a little bit slower and we most recently you have seen.
Some delays from the construction side of the business specifically on the HVA see availability to be able to get the new hvac's, putting the stores as you know we take second generation site. So we don't have the luxury of building new store all the time and we've got to deal with what we got in some of those are slipping out on us.
We'll just put them to work early next year.
Great and then John just as we think about gross margins in line, where they've been trending of late.
Yes.
A long history of <unk>.
<unk> gross margins on an annual basis.
Can you just give an update on how youre thinking about the timing of gross margin normalizing.
Yes, I think.
The guide we gave out for Q3 to 39, 4% to 39, six I would say, it's pretty close to normalization.
For me, it's a little bit lower than our historical 40%, but with the increased supply chain world. We're living in today I would say I'd be very happy with a 39, five and call that pretty normalized and I think we will get there in Q3 and Q4. So that that is all a function of the timing of when our supply chain start to normal.
And I think by Q3, that's when we'll start to see our new normal for supply chain and will build to be able to control our margin around it.
Very helpful. Thank you Dan.
Thanks, Brad and number four our next question.
Our next question comes from Randy <unk> with Jefferies. Your line is open.
Yes, Thanks, and good morning, everybody I guess a question for John can you just give us some perspective, you talked about an increased penetration of consumables.
During the quarter, maybe give us your thoughts on how you think about penetration or mix change in the business over the coming let's say six to 12 months and just related to that how is the consumer shifting around you and in your stores. What are you seeing the most change besides just shifting a little bit more towards consumable.
<unk> in the last 90 days just what are the key key highest level thought changes that you are witnessing with the consumer.
Randy with regards to the last question you had I would say the key thing we've seen call. It the last 90 days.
I would say that the consumer is definitely shying away from the bigger ticket items and.
And Thats something we don't normally play them, but we have we've had historically.
Eric with some bigger ticket items that are discretionary in nature. So those are items that we're not really going to emphasize in the stores. We don't think thats worth it at this point in time with regards to the consumable business as you know about 22% to 25% of our business is what we would what we would consider consumable we don't sell any anything this perishable or anything.
That's in freezer. So most of our stuff is snacks and cleaning supplies for HVA for the individuals so.
That part of our business is not.
The staple part, but it can be a driver to get people in the stores. So we are focused on advertising. These consumable products, but we're not necessarily planning to expand that category I think where we're sitting right now is probably our max capacity from the overall load that we do carry in our stores in our space allocation to these items.
So I think we're pretty stable on the.
The offerings I will tell you the offerings were getting for the consumer on the consumables front is very powerful and the brand names, we're able to get our hands on has been very compelling for the consumers. So I think that will continue to drive and that's that's the most important piece to get the customer in the store once you get them in the store and they see what we have on the.
On the discretionary front.
That's where we win.
Got it and can I ask one last quick question on.
In terms of the implied guidance around gross margin.
You talked about it starting to come back towards more normalized levels, starting in the third quarter.
That makes the SG&A rate I guess, a little more elevated so just just kind of thinking about.
Given the different puts and takes of the environment, where do you kind of feel like normalized gross margin and SG&A rates have to kind of sit going forward without kind of obviously, giving next year guidance, but just kind of feeling like we're maybe qualitatively where gross margin and SG&A may sit relative.
<unk> to historical trend thanks.
Yes.
Andy I would say the the gross margin would probably just a little bit below the 40% Mark that we've established and until we can get supply chain.
A little bit more back towards historical norms. So we're not far off but we've just got to be careful to make sure. We're continuing to value to consumer SG&A is slightly elevated but I would say that SG&A may be.
$25 50 bps.
A little bit higher than what it has been historically.
Coming out of 2022, but nothing material and I think we will continue to work on process improvement to try to get that back down and $23 24 period.
Super helpful. Thanks, guys. Thanks.
Thanks, Randy Thanks.
For next question.
Our next question comes from Ed Kelly with Wells Fargo. Your line is open.
Yeah, Hey, good morning, guys. This is Anthony.
Thank you.
Sure.
So just wanted to ask on the comp guide it seems to imply some sequential softening.
In Q3, as the index numbers against 2019.
Reacceleration in Q4 can you just walk us through what's driving those assumption.
Just some color on why we should expect comps to software.
Pipeline.
Yeah, Anthony obviously, theres a lot of uncertainty in the market today. So we werent has taken a conservative approach. We don't we don't feel it's necessary to really go out and stretch when we don't know exactly what's going to happen in the marketplace. So that's just our nature and Thats, how we run the business. So that's not a lack of confidence that just to make sure that.
We don't get ahead of ourselves and how we buy our inventory and how we plan. The overall infrastructure of the business with regards to the sales for the back half, they're relatively close on a three year basis.
Three year geometric basis. Their Q3 Q4 is not much different so we're not expecting a real acceleration or deceleration.
In between Q3, and Q4 is pretty much stable.
So that the guide really really doesn't change too much there.
Understood and then just wanted to ask about inventory it looks like inventory per store is that something like 3% Americas 19.
Management has a fair amount of incremental inflation, you mentioned amortized right maybe.
Can you just comment on how youre feeling about inventory levels at this point.
And then I may have missed.
But any color on the competition.
So as we think about things like unit growth.
Yes, with regards to the inventory Anthony compared to 2019.
And when I took over in December of 19, one of my Big pushes was to reduce our inventory levels in stores because I felt we are carrying too much and we had a lot of top stock on the stores and so we've always run with what I would call higher elevated levels, then I would like to see and that was part of my initiative, obviously Covid helped me get there.
A lot faster than I expected, but looking at our numbers compared to 19 were actually down on our inventory retail inventory in stores versus 19, which would be our plan with regards to the overall inventory levels in the stores I think we are spot on and our average inventory per square foot in the stores for 2022.
I am very pleased where were sitting where we're at.
With regards to supply chain I didn't fully catch your question on the can you give it to me again please.
I was just trying to understand the different components of that.
I know you mentioned the supply chain.
Sure.
Yes, the supply chain.
Last three quarters.
Has been increasing sequentially and we talked about it before our normal historical.
They run in the high single digits and they've been run in the double digits here for a while so.
We're working to get that down we do believe that the new norm, which will probably be closer to.
Call it 10% to 11% of.
Supply chain cost in the margin is what will be seen here for a while versus our old.
Seven 8%. So that's just us working through the overall merch margin to offset that.
Got it thanks guys.
Well. Thank you for one moment for our next question.
Our next question comes from Jason Haas with Bank of America. Your line is open.
Hey, good morning, and thanks for taking my questions.
Just one more.
John just wanted to get a little bit more comfort around the.
The gross margin Miss can you just talk about what what drove I think you said two thirds of the mix was in merch margin was that a reflection of the of the consumer buying more lower margin consumable products in terms of like a mix shift I know on the last call you had talked about.
We haven't put some price investment in just given the overall competitive environment or was it just the timing of deal flow.
But to a lesser degree Jason was the mix to a larger degree was the timing of deal flow and like I said, we're we're coming out pretty pretty bullish on Q3 is just a matter of when the time that the deals present themselves. We didnt get some of the deals done in Q2 than we had expected.
And the roll into Q3, and that's really just a shift of timing of when the deal slowed in the mix probably caused a little bit of pressure, but nothing nothing material. Most of it was just timing of the deal flow and SPL to get the price that we needed for the goods.
Got it. Thank you and then as a follow up there's been a little bit to talk about.
Minimum wage is going to $15 an hour in Pennsylvania.
Just broadly we know that wages are going up so I'm curious.
Where the business sits today in terms of the NIM.
M-hm wage that youre paying and I'm, just wondering what effect that would have if wages need to go up.
Yes, and we've always said if minimum and it's obviously gotten lesser and lesser of a discussion Jason as the years go on but.
As if minimum wage goes up overnight to $15 that would definitely create some significant pressure.
Most of our store level folks, but the gap has been closing or our average hourly rate at the store levels are.
Probably sitting at 11 Bucks an hour now so the delta is not as big as it was when we first started the discussion, but it would be a meaningful change if I just stepped up in a very fast fashion, we'd have to navigate through that but it would it's I think every dollar cost.
Sure.
I think it's about 10 cents of EPS that you would have to invest into it. If we had to go through that so you can kind of do the math with that.
Jason This is Eric we continue to be Super focused on.
Improving productivity at store level as well not to try to indicate that we could offset minimum wage of $15, but we do continue to see opportunities.
To improve our productivity and improve our operation at store level. So we're working hard to offset wage pressure as we move along.
Got it thank you.
Thanks, guys. Thanks, one more before our next question.
Our next question comes from Jeremy Hamblin with Craig Hallum. Your line is open.
Thanks, I wanted to ask some questions about unit development then pushed.
Push out.
Location is sliding into FY 'twenty three just wanted to understand in terms of the roughly five or so locations that are sliding into next year is that going to be additive to the total for all of next year in other words if you.
You were targeting roughly 50 locations next year previously.
Now going to be.
55.
Hi, Jeremy it's Eric I'll take the question.
It's not additive to 2023.
Built the model at least at this point in time to open $50 to 55 stores a year.
A year from an operational standpoint, that's how it's built and we don't intend to.
Based on the Pushout, we also don't have clear visibility into 2023.
At this point were.
Certainly committed to opening stores in 23 two.
Just to be on our typical cadence.
But the visibility is not 100% clear at this point, but we would not exceed to answer your question.
Got it and then just as another kind of unit development system development question. You noted that the DC that you expect to open in the FY 'twenty four wanted to get a sense for what the potential margin impact.
Might be from that.
Yes, Jeremy historically, when we've opened up a new DC and I think as we get as we get more scale the margin impact becomes lesser.
From a startup perspective, so I think historically we've had.
100 to 150 basis points of pressure on the first year and then it eases pretty rapidly I would expect something less than that for.
For the fourth D C just because of our size.
The building will be putting into the play is the same size as our historical buildings that we've done most recently in Texas. So I don't think the drag would be quite as big as it was in the past, but I probably plan for and.
And I haven't looked at the numbers that work, but thats far out for us what price call. It 75 to 100 bps drag potentially.
Your one and then probably easing pretty quickly.
In years, two and three.
Great that's helpful context.
If you don't mind, just one other follow up here on the sales cadence and just backing up a little bit too.
<unk> played out and how the near term is playing out.
My sense is that maybe you saw may is a strong month and collecting higher.
Maybe June and July were a little bit softer.
Whether or not youre seeing a pick up here in August but.
Would you be able to provide just a little bit of context around what youre seeing in terms of your.
Sales trends kind of.
Essentially are the cadence over the last few months.
Yes ill give you a little bit of color, we don't normally give too much on this Jeremy I would say, we're just the universe of what Youre thinking may was our a weaker month in the quarter.
June and July were very comparable to each other.
And obviously going into Q3 going into Q3, where we're guiding to a $3 five to five and a half comp we're comfortable we're at there.
Got it thanks for the color guys best wishes.
Jeremy Thanks, Jeremy.
One moment for our next question.
Okay.
Our next question comes from Kate Mcshane with Goldman Sachs. Your line is open.
Hi, Thanks, good morning.
I just wanted to ask for a little bit more detail on the price investment you took during the quarter. We wondered if it was broad based or more particular categories.
How do you think your pricing relative to other retailers.
Retailers currently.
Sure Kate obviously, our goal and our reason for existence is to be the lowest price in the market. That's what <unk> is all about and that's why we exist as a closeout retailer. So I would I would always tell you, we expect and plan to be the lowest price that youre going to find in any other retailer for the comparable or same item.
With regards to where do we invest in price we.
<unk>.
That would be a very detailed question I would not be able to give you the specific answer on by categories, but we look at each and every item compared to the market. So we buy it and we try to buy it the best we can we try to price it as low as we can for the consumer so the investment that would that we put into it is the reflection of our overall margin.
To Jason's point that he asked earlier from Bofa.
The timing of deals presented themselves are the pieces that drive the margin and in Q2, we didn't have some of the deals present themselves. So we've seen them in Q3, and that's why we're a little more confident in Q3 with the margin that we're putting out there thats.
Step up from where we were before.
Thank you.
Thanks Kate.
One moment for our next question.
Our next question comes from Simeon Gutman with Morgan Stanley . Your line is open.
Hey, good morning, guys not.
Not to beat the dead horse on gross margin, we do like maybe a walk from Q2 to Q3, it sounds like Q3 supply chain costs price investments and I guess, maybe it's the mix what changes specifically when we walk into Q3 that the supply chain cost that Ed or do we have the mix that returns back to normal.
Supply chain pressures ease significantly Simeon.
From Q2, and we get as we get a margin pickup we get our merch margin pickup as well, but the supply chain is the bulk of it.
And thats the.
Direct supply chain or is that capitalized costs that just came through heavier in the second quarter or is it just that it was direct cost during the quarter.
It is both but mainly the the capitalized cost of Gwent out quicker in Q2 that we're not going to experience in Q3, but we're seeing improvements in transportation as well that will benefit us in Q3.
Okay, and then did the price investments do you see an immediate lift to that or is that something that that drives some of that.
Topline benefit overtime, and then related to it.
The merchandise that you have the inventory that you have.
With regard to discretionary purchases versus consumable.
How confident are you that the consumer you said, we think people will show up to get these great deals are going to be too good to not.
Whats the confidence level in it given that there is a lot of reversion and a lot of discretionary and durable type of goods right now.
Yes, I would say that we're pretty confident this is this is what we're built for it and then in Q2, you can see our <unk>, our leading department was lawn and garden.
That's discretionary so automotive hardware. They there were some drivers its deals that drive it so I'm pretty confident where we are careful in terms of the price points, we're putting out there for the consumer the higher the price point, the less likely they are to buy but.
We are in.
We've done this before and we've seen it in 2008 2009, so we understand where to go and how much value we have to give to the consumer.
We believe we are well positioned and we did see some some responses in Q2 and I think that will continue.
Okay. Thanks, John Good luck.
Thanks Amy.
One moment for our next question.
Our next question comes from Scot Ciccarelli with <unk>. Your line is open.
Hey, guys Scot Ciccarelli.
John you've been talking about strong deal flow for several quarters now, but I guess the growth cadence or Geo stacks are certainly better than first quarter, but maybe a bit more modest than I guess, we would have expected in this kind of inventory overstock environment. Thank you.
Can you help us understand if you think thats just a function of timing differences.
It should start to improve but we just haven't seen it yet or if maybe theres, even maybe a better merchandize mismatch, meaning they are overstocked in a lot of different categories, but the biggest problem area. We keep hearing from other retailers seem to be apparel, which isn't necessarily something Alex typically travel time.
Correct, Yes, we do.
We are not an apparel retailer so that does not really play into our hands that plays into some other <unk>.
Discounters hands, but with regards to the deal flow Scott I would say we were very.
Pleased with the results we saw from going from Q1 to Q2, there was a pretty significant step change in our trends.
Which would tell me that the customers respond to what we have and what we're offering so I think that while it's not off the charts. It's a big big change in terms of where we're running before on a three year Geos stack. So we're very excited about that the deal flow as.
As we said even in Q2.
I believe the deal flow is going to get stronger as this year goes on it's just starting to really present itself here in Q3, but I think it's going to become more powerful as the year goes on so that's just going to add more opportunities for ollie's and all of these customers.
But if I can follow up on that why do you think you haven't seen more already.
Ed or whether it's Walmart target whoever talking about massive markdown activity liquidation activity I guess I would have expected to see it kind of flow into your channel a little bit faster in terms of the sourcing.
Closeouts don't work that way Scott.
Many many times to closeout take time to be able to become available for us at our pricing and our what we're willing to pay for for the consumer So closeouts don't become Theyre at immediately liquidated like you would think so and I am very clear with that every time, we speak it normally takes time for those who present themselves in the market.
Got it thank you.
Thanks.
One moment for our next question.
Our next question comes from Matthew Boss with Jpmorgan. Your line is open.
Great. Thanks, John .
John on the topline trends I guess when exactly did you see the accelerated shift towards consumables versus discretionary and then on that have you seen any notable changes in relative category trends. During August and then just last on the deal deal flow any categories, specifically that you are real.
Excited about as you talk about the opportunity.
Well, Matt I would tell you theres a lot of categories that we're seeing a lot of deal flow in.
I'll kind of go back to how we're looking at we're seeing a lot of deal flow in almost every category other than clothing.
So I would tell you there is a ton of deals out there in the HBA housewares hardware.
Automotive bed and Bath, we're actually seeing deal flow and pets.
Toys is huge right now so there is not a category other than closing and we're not seeing a lot of a lot of deal flow, which is just fine for me. So I have no issue with that.
Your first question Matthew I forgot the the beginning part.
Just on the accelerated shift towards consumables versus discretionary when exactly did you see that and it.
Did that change as you moved into August .
Yes, we haven't seen a lot of change in the consumables from what we saw in Q2, we started to see that shift than prime pri.
Right into Q2, just after Q2 started there start to be an acceleration on the consumables part of its deal flow, Matt We've got some great.
Non discretionary items in the HBA front that we're sitting in the food has gotten in much better shape. So we're really seeing some great deal flow for some of the major manufacturers, which is helping drive those dose consumable items.
But not a big shift into into Q3, we've seen a pretty it's gotten a little steadier and we're not seeing as much a shift in the consumables. So I think we've got a handle on that.
Great and then just on the pricing investment into value.
We elaborate a bit on that decision was it traffic trends was it any changes in competition or when was the last time, you made an investment into value similar to this.
I think we do it every day, Matt as the retailers get more aggressive on pricing or more aggressive promotions, we're always going to try to be below the other other retailers. So our merchants look at each and every item individually and they make the change if they have to so it's there as theyre looking at the market when they're sizing up of deal it's what we.
What's the best price for our customer and what's the lowest we can pay for it and thats. The the Genesis of the merchant runs runs their business.
Great Best of luck.
Thanks, Matt.
One moment for our next question.
Our next question comes from Paul <unk> with Citi. Your line is open.
Hey, Thanks, guys can you maybe talk about the traffic versus ticket in the second quarter, what you are and what your third quarter assumptions are.
Also curious.
Have you ever had.
<unk> of deal impact your gross margin that way I guess I'm, just not quite understanding why why a couple of deals would cause such a shortfall given your historically consistent gross margin performance.
And then last one just curious what percent of your customers shop.
With cash as opposed to credit debit.
Yes, Paul with regards to the deals and the margin as you know there's been a ton of pressure on supply chain. So we've had to.
Plan to get a higher initial markup and deals do drive the markup in one or two large deals can drive the overall Martin merch margin for a quarter. So in a normal world when we're sitting at 8%, 9% supply chain costs versus $14 $15, 16% you have a lot more flexibility on the <unk>.
Hello on the price of the item than you do right now so have do we normally have that no. We don't have the pressure either so it is.
A time period, where we need the deals present themselves to offset some of these costs the margin the supply chain is starting to.
Let up a little bit and we're starting to see a reduction there. So that's going to give us a lot more opportunity to price accordingly, and still hit our mark hit our merch margin goals that we have and deliver the margin to the shareholders. So I'm pretty confident that that's just that's just how it rolled out in Q2, and we have seen it before or just you guys probably don't notice it when we deliver a quarter and we did.
Over 41, 5% margin no one asked because thats pretty strong, but thats outsized as well.
Deal would have done that from that standpoint so.
But I think we got a pretty good handle on it and we're definitely seeing the supply chain ease and we're starting to see it stabilize so I think we'd have line of sight for the back half of the year, we're pretty comfortable where we're sitting.
With regards to our customers how much pay cash versus credit, we're 80% plastic 20% cash.
Got it and then just the traffic ticket.
Yes, the traffic ticket piece hold on one second here are we had a sequential improvement on the overall.
Trend Thats call it transactions and ticket.
<unk>.
Transactions were actually down mid single digits.
And they were mid double digits last quarter and then our.
Average basket was up mid single digits to get us to 1.2.
Yes.
Okay, and then just one follow up on the third quarter gross margin tied to the deals the product that you were expecting to come in and <unk> at such favorable merch margins you already got that in an <unk> or are you just anticipating that it's still going to come.
We've got some of it in and we've got some of it purchase. So we have line of sight to where were sitting with the margin.
Okay. Thanks, guys. Good luck.
Thank you Paul.
Remember for our next question.
Okay.
Our next question comes from.
Loop capital your line is open.
Good morning, Thanks for taking my question I, just wanted to kind of take a step back here.
Yeah.
This is the second quarter in a row that you've missed.
Hence the expectations the second quarter in a row that you've reduced your guidance for 2022, and I certainly understand that things can shift around from quarter to quarter and.
We are in a tough macro environment like I get all of that but I guess I'm just trying to figure out what the disconnect is here right because.
There's all this talk about all this inventory that's out there and how great everything is but it doesn't seem like it's flowing through your numbers. So I'm just trying to figure out are the deals not as good as you thought they were going to be are there execution problems is it the consumer I mean, what exactly is happening because it just seems like there's a big disconnect and it seems like we have the same kind of call quarter. After.
Quarter after quarter.
Yes, I don't think I agree with you on that I think that Theres been no disconnect. I think we've been very very clear that we believe that deal flow was going to get.
Going to become much stronger in the back half of 2022, we had never given the illusion that it was going to be strong in Q2, and we were very clear that we're working through a ton of supply chain headwinds and we have a lot of pressure on the margin. So I don't think theres been an mis execution step.
From our from our perspective, the timing of new stores deaths.
Definitely definitely.
The item that we're not happy with but we can't control the availability of product related to Covid and supply chain issues. So I think most of our Miss steps in this this year have been easily explainable and understandable, but the deal flow and the timing I've been very clear that that's not going to be something that we thought would break loose until back half of 2022.
Something we setup that would have to be a Q2 item there.
A difficult pressures on the margin already built into only when we went out and gave guidance.
Got it thanks for the clarification.
Thank you.
And I'm not sure.
Tom I'd like to turn the call back over to John for any closing remarks.
Thank you everyone for your participation in today's call and continued support we look forward to updating you on our third quarter results on our next earnings call stay safe. Thank you.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
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