Q3 2022 Ollie's Bargain Outlet Holdings Inc Earnings Call
Yeah.
Okay.
Good morning, welcome to Ollie's bargain outlet conference call to discuss the financial results for the third 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 this call is being recorded and the reproduction of this call in whole or in part is not permitted.
Expressed written authorization the bodies.
Joining us today.
Joining us on the call today from all these major but are John Swygert, President and Chief Executive Officer.
Alexander of Elk, Executive Vice President and Chief operating Officer, and Rob held senior Vice President and Chief Financial Officer, I will now turn the conference call over to your host Lynn Walter with ICR. Please go ahead.
Thank you good morning, and welcome to all of these third quarter Conference call a press release covering the company's financial results was issued this morning, and a copy of that press release can be found in the Investor Relations section on the company's website.
I want to remind everyone that management's remarks on this call may contain forward looking statements, including but not limited to predictions expectations or estimates and that actual results could differ materially from these messages 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.
Should not place undue reliance on these forward looking statements, which speak only as of today and we undertake no obligation to update or revise them for any new information or future events.
Factors that might affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K.
What are the 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 maybe important for investors to assess our operating performance reconciliation of those most closely comparable GAAP financial measure.
Yours to the non-GAAP financial measures are included in our earnings release and with that I will turn the call over to John .
Thanks, Lynn and Hello, everyone. Thank you for joining our call today before we begin I would like to welcome Rob Helm, our new Chief Financial Officer to the Ollie's family Rob.
Rob has a strong track record in the consumer retail sector and I am confident in its ability to be a valued contributor to Ali's and look forward to working with them for well with him for many years.
Our third quarter total sales increased 9% over last year and comparable store sales increased one 9%.
While we were pleased with our overall sales results for the quarter, we were tracking to the low end of our comp guidance until we experienced softness in business. During the last two weeks of October .
During the quarter more than half of our departments generated positive comparable store sales, we saw particular strength in lawn and garden hardware.
Food health and beauty AIDS and sporting goods.
We were pleased with the significant improvement in our gross margin rate compared to last quarter. This was driven by lower supply chain costs and improved merchandise margin.
We continue to invest in price to motivate consumers as the competitive environment is highly promotional as.
As consumers need to save on everyday essentials, we are seeing continued strength in our consumable categories.
We believe we are well positioned to thrive in the current environment and we have tremendous deals in our stores and in the pipeline.
The closeout market remains extremely favorable with deals deals and more deals where.
We are seeing incredible opportunities across all of our categories and the availability of deals continue to grow from both new and existing vendors.
At this point, we see no slowdown in sight.
We saw good stuff cheap and this type of environment allows us to emphasize our compelling value proposition to consumers.
Moving to real estate we.
We had a busy quarter opening 15, new stores and closing one due to a relocation which reopened early in the fourth quarter win.
We ended the quarter with 463 stores in 29 states compared to 426 last year.
Well I'll start while store opening challenges persist we have opened 39 stores as of today, bringing us to a store count of 467 with one additional store opening plan in January .
We remain pleased with the productivity productivity levels of our new stores overall.
New stores are the engine for our sales growth, we continue to face challenges in the market today with permitting and construction and as a result, we expect to open approximately 45 stores in 2023.
A long term plan is to open between 50 and 55 stores annually and are confident that our model can support over 1050 stores in total.
In terms of Remodels, we are pleased with the results of our store remodel program. We have tested several different layouts and continue to learn what works best for our customers. We have remodeled 15 stores. So far this year and plan to complete between five to 10 more by the end of the fiscal year for a total of $20 to 25 stores.
Turning to our supply chain, we are well positioned to benefit from the improvements we have made to our supply chain over the past year.
The environment is more favorable as pressure on transportation continues to ease compared to last year in the first half of 2022.
We're in a strong position to service our stores during the peak holiday selling season.
To support our new store growth, we are finalizing plans to open our fourth distribution center in the Midwest and have agreed to purchase land in Princeton, Illinois.
Together with the expansion of our York, Pennsylvania Distribution Center next year, our distribution Center network will be able to support over 700 stores.
We expect to complete the expansion of our York distribution Center in the first half of 2023 and the fourth distribution center by the end of the second quarter of 2024.
On the marketing front, we have made progress on enhancing brand awareness to attract new customers and motivate existing customers.
As part of our 14th anniversary celebration, we unveiled a 16 foot seven inch bobble head of our mascot Ali which won the Guinness World record for the world's largest bobblehead.
This event created a lot of buzz for our brand and generated over 1200 news mentioned through our online TV and newspaper outlets, our 40th birthday events, including our including our America's biggest cheapskate contest combined with our enormous bobblehead led to over 1 billion impressions of our brand.
We invite you to visit the Ollie's Bobble head on display at our Harrisburg, Pennsylvania store.
We are excited by the results, we're seeing from our social media strategy to test micro and nano influencers.
Platform, such as tick Tock, Facebook and Instagram, which we began in the second quarter, we will continue to invest in and build on all forms of digital marketing.
Ollie's Army continues to perform very well and accounted for over 80% of our sales and grew five 2% during the quarter our.
Our busiest and most exciting night of the year Ollie's Army Night is this Sunday December 11th.
We're thrilled once again to open our doors exclusively to Ollie's Army members. Our teams have worked tirelessly to fill our stores with tremendous deals for the special night, and we can't wait to welcome our loyal bargain knots.
Come join us for a great evening of funding bargains, if you're not if you're not on.
Holly's Army remember, there's still time to enlist and share in the fun and special savings, we hope to see you there.
Our civilian database, which was which is comprised of non ollie's Army shoppers also continues to grow in October we began testing targeted direct mailings to these customers as part of our efforts to expand our customer base.
We are encouraged with the progress we made during the third quarter. We recognized that consumers are facing significant inflationary pressures and remain focused on what we can control, which is delivering great deals to our customers.
Although the environment remains uncertain, we were pleased with our Black Friday sales as customers responded favorably to our in store deals.
Our quarter to date comp store sales trends are running in line with our updated guidance.
We have a lot of business still in front of US and believe we are in great inventory position to finish the season is strong.
In closing we are a high growth company and one of the most attractive sectors in retail extreme value and we believe we have the scale the know how and their relationships to better benefit from the continued disruption in the marketplace. We have tremendous runway to expand our footprint and we believe the value proposition of our business model supports our long term growth.
Plans.
I'll now turn the call over to Rob to take you through our financial results and Q4 outlook in more detail.
Thanks, John and good morning, everyone I'd like to start off by thanking John Eric and the rest of the team at <unk> for the warm welcome I've only been here for a few weeks I've been really impressed with the caliber of our team and the dedication of our associates.
For the third quarter net sales totaled $418 million, an increase of 9% from the prior year.
Comparable store sales increased one 9% in the quarter compared to last year.
During the quarter, we opened 15, new stores and closed one store ending the quarter with 463 stores in 29 states and eight 7% increase in store count year over year since.
Since the end of the third quarter, we've opened an additional four stores.
Gross profit margin declined 40 basis points to 39, 4% compared to 39, 8% in Q3 last year due to higher supply chain costs and slightly lower merchandize margin.
We were pleased with our significant gross margin improvement from the second quarter, primarily driven by lower supply chain costs, which were meaningfully lower than the first half of the year. We also benefited from a higher merchandise margin compared to the second quarter.
SG&A expenses as a percentage of net sales increased to 29, 9% compared to 29, 7% in the prior year. The 20 basis point increase was primarily due to the deleverage of our fixed expenses related to higher selling costs, partially offset by our disciplined expense control.
Operating income totaled $30 million for the quarter flat to last year.
Operating margin decreased 80 basis points to seven 1% due to higher supply chain costs are slightly lower merchandize margin and higher selling costs.
Adjusted net income was $23 million and adjusted earnings per share was 37.
Compared to 34 last year.
Adjusted EBITDA was $39 million and adjusted EBITDA margin decreased 50 basis points to nine 4% for the quarter.
Inventories increased 11% to $524 million in the quarter compared with $472 million a year ago, primarily due to the increased number of stores the timing of merchandise receipts and higher supply chain costs.
In addition, it is important to note that our inventories at the end of Q3 2021 were lower than our historical level due to the supply chain disruption.
Our balance sheet remains strong with $182 million in cash on hand, and no outstanding borrowings under our revolving credit facility.
Capital expenditures totaled $15 million, primarily for new and existing stores and the expansion of the York distribution Center. This compares with $12 million in the prior year.
During the quarter, we invested $20 million to repurchase stock to Merck.
We purchased shares of our common stock.
Moving onto our outlook for the fourth quarter, we have a lot of business ahead of us, including Ollie's Army night, and believe we are well positioned to deliver great deal to our customers.
However, given the uncertainty and unpredictability of the current environment, we are adjusting our expectations for the fourth quarter.
We now expect total net sales of $540 million to $550 million.
Comp store sales of flat to 2%.
Gross margin rate in the range of $38 two to 38, 4%.
Operating income of $66 million to $70 million.
Adjusted net income of $49 million to $52 million.
And adjusted earnings per share of 78 to 83.
Both of which exclude excess tax benefits related to stock based compensation.
For the full year, we now expect total net sales of 1817 to $1 $82 7 billion.
Comp store sales of negative $3 eight to negative three 3%.
The opening of 40, new stores less two relocations and one closure.
Full year gross margin of approximately $36 one to 36, 2%.
Operating income of $129 five to $133 5 million.
Adjusted net income of $98 eight to $101 8 million and adjusted earnings per share of $1 57 to $1 62, both of which exclude excess tax benefits related to stock based compensation.
And annual effective tax rate of 24%, which excludes the tax benefits related to stock based compensation.
Diluted weighted average shares outstanding of approximately $63 million.
We expect capital expenditures in the range of $55 million related to new stores, Our York distribution Center expansion.
Costs related to our fourth distribution center.
<unk> level initiatives and it projects.
I will now turn the call over to the operator to take your questions.
Thank you ladies and gentlemen, if you have a question or a comment at this time. Please press star one on your Touchtone telephone, we will pause for a moment, while we compile our Q&A roster.
Our first question comes from Brad Thomas with Keybanc capital markets. Your line is open.
Hi. This is Taylor is that gone for from Brad Thomas I. Appreciate you taking the question.
I was wondering if you could talk a little bit more about the cadence of the sales during the quarter and then if.
If you can talk anymore about how the holiday is shaping up more specifically.
Sure with regards to the overall cadence of the quarter as I said initially our our trends are running really really strong and at the low end of our guidance until the end of the 11th week of the 13 week quarter.
And we had some some slowdown in business mainly related to warmer weather.
And obviously, we're locked and loaded for the cold weather at this point in time and that did not come out in the Q3 perspective, but obviously looking at the overall.
Quarter was actually.
August and September were pretty much in line with each other in October was definitely a drag on the overall quarter.
And as we said we're liking the way the fourth quarter shaping up we had a.
Our strong black Friday.
In our Black Friday weekend, and we continue to see some nice trends in the business and where were obviously pretty comfortable where we're sitting today and we feel good with the business.
Got it. Thank you if I could just squeeze one more in can you talk about how the toy and maybe seasonal.
Maybe just generally how the discretionary items are performing versus the more staple items.
Yes, obviously.
That's a couple of questions there toys toys as a seasonal item as well as holiday. So I know, we have a ton more discretionary items within our stores. So discretionary is performing well as you could note in our top five selling departments lawn and garden and hardware are definitely under discretionary front those are our top two departments in the in the quarter.
So we're definitely seeing some pressure on some discretionary items that are higher ticket but.
But we believe the value proposition were providing is pretty strong and the consumers are responding as well with what we're offering.
With regards to toys, obviously last year was a little unique to where theres a lot of supply chain disruptions people worried that there was going be a shortage of holiday goods. So we believe the toy sales were pulled forward a little bit into Q3 last year. So it was made a little bit of a tougher Q3 for us.
17 shopping days to go for the rest of the holiday period.
We're in very good shape of toys, and we feel like we'll end that willing to see some pretty strong.
Thank you and best of luck.
Thank you one.
One moment for our next question.
Okay.
Our next question comes from Peter Keith of Piper Sandler Your line is open.
Hi, This is Matt Eger on for Peter Thanks for taking our question.
Just real quickly.
How is the closeout backdrop kind of changing sequentially.
You mentioned that youre getting more and more closeouts.
How is it changing and then how is the margin on those closeouts changing I appreciate it.
Yes. The overall closeout business has has been strong I will tell you. It is getting stronger the deals are getting bigger.
And we're seeing some positive movement there as we had expected I don't think this is a surprise to US we had obviously we can't call the timing of deals, but we are seeing some nice flow.
Some some categories that we're excited about where we're seeing good good activity in the flooring Department automotive I believe not lawn and garden Domestics Housewares, our biggest contributors right now to the deal flow closeout margin profile is pretty consistent year over year, we feel real good with where we're sitting on the margin profile of the deals. We think we are.
We're going to continue to see momentum in the business as we move forward here.
Great.
That's good to hear.
And then I guess.
Maybe you just answered this on you can't really talk to timing, but how long do you think this elevated closeout environment can last.
We never know that answer to be honest with you close outs have been pretty good for 40 years. So I would tell you. The closeout business is pretty strong I think the.
What we're seeing today in the overall inventory challenges that people are facing.
Lot of goods that are sitting in warehouses I would tell you I think we have pretty good runway through at least the first half of 'twenty three through 'twenty three.
Great. Thanks, I'll hop off.
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 I'm curious of your aging anything Hey, John I am curious if youre seeing anything this year that changes your philosophy around the long term algo for the business.
I think in the past we've talked about.
1% to 2% annual comps and a 39% to 40% gross margin I understand there's things that can swing that gross margin around but I'm curious if just given there's been some volatility this year understandable given the environment we're in.
Any changes here to the long term algo.
Yes, I think Jason the answer on that would be I don't think the answer is no.
I'd tell you I am pretty excited about 2023 coming out because I think we can get back to more normalized Kate.
Cadence in a more normalized business model and people can get the lifespan of normal so, which I think will bode well for us and everyone else in the business.
I don't think that the long term algo.
Changed at all.
I'll call it the Choppiness in 2023 for us to get back to our normal algo margin, maybe a little bit lower on 'twenty three than wed like to be but I think we'll get there by 'twenty four as we said that the store growth I'd like to be at $50 to 55, just with the permitting and construction challenges I think 'twenty three you'll be.
Call. It 45 stores, so I have a little bit of slowness in 'twenty three with regards to long term algo, but I think we are right back to it and thats intact.
Got it that's great to hear and can you just remind us how that business performed.
Through the last recession in <unk>.
<unk> period.
Just curious going forward, assuming you're at the.
The low income customer remains under some pressure.
What extent do you expect to see some trade down and could that be potentially greater benefit going forward.
Yes going back to the two.
2008, 2009 period, obviously it was a long time ago, I think very different than it is today.
But we obviously experienced about an 8% comp store sales in 2009.
Which was very strong the customers responded to the deals we had in the pipeline and what we offer to the customer they were under significant financial pressure.
This one I think is a little different.
People have had.
A lot of time at home they have not spend as much money as they had previously and also they didn't we haven't had a real shock to the financial system like we had in 2008 2009, but there is obviously the inflationary pressures are going to put continued pressure on folks up at the lower income and middle income ranges I think.
With the <unk> of the heating bills and whatnot are going to create pressure. There. So we should see some favorable let's come back to us Jason It's Eric I'll just jump in on trade down we are seeing a similar trend in Q3 similar to Q2.
We're encouraged that the customer the higher income customer is trading down.
We're continuing to see the lower income fixed income consumers trade out it's still a marginal benefit.
Todd.
Similarly to Q2, so slightly favorable.
So hopefully that trend continues we see stabilization of ethics lower income consumer in the continued trade down to the higher income consumer moving forward.
Sounds good thank you.
Thanks, Jason one of them before our next question.
Our next question comes from Edward Kelly with Wells Fargo. Your line is open.
Yes, hi, guys good morning.
John You mentioned a couple of things for you.
Q4 gross margin guidance came down can you maybe just provide a bit more color on that and then you mentioned in response to another question that the 2023 gross margin.
People low where you'd like it today.
Could you provide more color there as well and sort of how we should be thinking about it I guess the whole thing right is that and are you buying product what I would expect to be at a very good rate.
But yet there is still margin pressure.
So maybe could you just sort of wrap it all together for us this year, we sort of think about those two items acute foreign clients right.
And obviously, we're coming off of Q2, which was probably the lowest margin we've ever delivered to the street at a 31 and change which was severely disappointing. So we obviously had said we expected to be at close to $39 four for this quarter and we deliver that number. So we've done a lot of work to get back to.
To where we think we should be the Q4 <unk>.
Slight change on the margin is really related to deleveraging with the pullback on the sales from our last guide from a three 3% to five down to zero to two so that's just the leverage of.
The deleveraging of supply chain costs that we have to deal with for that quarter, which is temporary it will come back to us.
With regards to 2023, we are seeing great deal flow I do think we have some opportunity in the margin, but I don't want to get ahead of ourselves and set up set ourselves up for disappointment, we're going to have some nice improvement in the margin for 'twenty three versus 22 I.
I don't think we're going to see.
I'd love to see a 40 and if I can get it I'm going to get it and deliver it but im probably closer to a let's call. It 39, right now with regards to full year 2023.
I wanted to get a little more time under our belt to see how the supply chain cost shake out here in Q4, and if we think we can do better than the 39, we will definitely give you a better guide than now.
And the upcoming call in March, but I don't think Youre looking at a 36% or seven I think it will be close to it will be closer to the 40% or not.
Okay and then.
Just another bigger quake.
Thanks for your question for you.
You're getting great deals today Youre Flyers robust.
The question is though is that.
Really seem to be responding in a way that.
Historically, we would have expected I guess.
Why do you think that is the case and what does that mean, even for next year.
Yes, I think the consumers are responding Ed obviously, the number one department, we had was lawn and garden. So that's that's a total discretionary department and consumers responded pretty well to that hardware as well as discretionary and they responded pretty well to that so I think they are responding I just think that we're operating in a highly inflation.
Gary environment as we continue to say, it's an uncertain environment. It is a very promotional environment. So everyone's fighting for everyone's dollar so I think that.
And my <unk>.
Disappointing that we didn't keep our three and a half comp going.
In the quarter, but we had we had some weather that impacted us that we know was not something structurally wrong with the business and the cold weather is going to come and we'll get those sales back. So we feel like we're well positioned and will continue to move forward and I think we're getting back to a more stable.
The operating environment and the company's on the right track to continue to deliver increased earnings to the shareholders.
Okay. Thanks, guys.
Thanks, Ed one moment for our next question.
Okay.
Our next question comes from Jeremy Hamblin with Craig Hallum. Your line is open.
Okay. Thanks.
Wanted to come back to the gross margin.
For Q4, and just understand so it looks like you're guiding to about 75 basis points to 100 below expectation.
And some of that.
With.
Be explained by the downside I think of roughly $17 million.
Lower sales forecasted for Q4.
But I need to understand some of the categories underperforming toys in particular, you're running a.
15% off promotion ahead of Ollie's Army night, I don't think Thats consistent with what you've done historically historically toy promotions have always come after Ollie's Army night. So I wanted to just understand whether or not there is certain categories.
<unk>, maybe being one of them were.
You talked about in the prior.
Buyout deal that toys were I think like 40% of that deal, but just wanted to understand if some of this is more <unk>.
<unk> that you brought in that maybe aren't moving as well as you had hoped as opposed to just pressure.
Pressure on.
Your consumer.
Yes, Jeremy with regards to the Q4.
Margin I would tell you, it's 100% attributable to the deleveraging of sales the merch margin, we expect that to actually be up year over year. So theres not a compression on the merch margin from from Q4 of 'twenty two to 'twenty one so it's the.
Importantly, the implied.
Sure.
Margin guide that we're giving is really related to the 17 and $18 million of lower sales volume for the quarter with regards to our promotional event for toys.
As you know we're operating in a highly promotional environment, everybody is being very aggressive with the seasonal toy items right. Now we don't have a toy issue. We're trying to take advantage of the holiday period, where people are shopping very heavily.
And what I think all of that's going to do for US is we will have less markdowns on the post holiday period.
When we normally do and we're getting again, some nice impact from the overall.
The promotional.
Promotional environment, we're running today for a five day period, so I'm not too worried about that I think we're just we're just changed dollar. So I think we'll be changing less dollars in markdowns when it all was all set all done.
So I think we're very comfortable with where we're sitting in our inventory position.
Okay, and then just a follow up question on that.
Europe .
DC expansion.
Can you give us a sense for what the potential impact on margins might be in the first half of the year or.
If it would carry on into the second half of the year.
Jeremy the expansion of the D C and York, we'll not have any impact on the margins.
Yes.
Thanks, <unk> III at all okay.
Gotcha, Okay. Thanks best wishes.
Thank you.
One moment for our next question.
Our next question comes from Eric Cohen with Gordon Haskett. Your line is open.
Curious of the underperformance sort of how much would you attribute to kind of execution versus more external dynamics and how have you incorporated those learnings in setting the Q4 guidance.
I think Eric with regards to execution I don't think any of it was execution I think it's just the external factors. We're all dealing with not just I'll leave it to everyone who's out there so.
There is challenges with what the consumer the consumer is under significant pressure with inflation.
So we're just dealing in a very uncertain environment and I think we're navigating pretty well.
I'm not I'm not.
Ashamed of a one 9% comp in two quarters are all positive comps. So we're just going to build off of that and continue to move forward. So I think I think we're in good position to execute Q4.
Obviously, we're taking the guide down a little bit from where we were before and I think that's just a prudent thing to do with all the uncertainty and the highly promotional environment, we're running in but I think we're navigating a very well I think we're locked and loaded for the remaining 17 days here of the holiday and I think when it comes out of the holiday and ready to go. So I think we're in good shape.
And then just.
Last year around this time, omnicom was becoming a headwind and certainly impacted store traffic.
Lack of visibility on the timing of inventory receipts and sort of how are you going to market different this holiday season versus last year.
Minus sort of what the comp cadence was in Q4 last year.
Yes, Eric with regards to your Youre correct with the resurgence of army chronic for last year and I do think that that does provide some upside for us on other retailers.
Later in the holiday season, so it's something that I think is a positive we've not really baked that into our numbers. We've kind of just let that let that be at this point in time. So I think the inventory position. We're in today versus last year from a seasonal perspective is much stronger and I think we have an opportunity to finished pretty strong.
As we as we round up the holiday season, So I think the.
The lessons we've learned is to just be conservative and move forward with what we're what we're seeing in guiding with what where we're at so far quarter to date.
Yes.
Thank you one moment for our next question.
Our next question comes from Mark Carden with UBS. Your line is open.
Good morning, Thanks, so much for taking my questions. So to start when you see deals of the magnitude of the one that you heavily advertise this quarter how long does it typically take for you to sell through them could we expect to see much in the way of further tailwind in <unk> or is the bulk of the lift from that one already taken place.
No.
Al through of that item and those deals that are that large they take a while to sell through but obviously the the tapering of the velocity does does start to taper down, but we have we are still in pretty good inventory shape going into Q4 with that deal and will benefit.
From that deal.
Well, but I got to remind everyone that deal is while it was exciting well promote it we make it bigger than life.
It's not that large relative to our total inventory in our total sales velocity for Q2, and Q3 combined but it's very it's meaningful but it's not it's not the MLB all there.
Got it that's helpful. Thanks, and then we've seen some states start to put out their own stimulus plans.
Excuse me I missed that.
Alright, okay.
So back to my follow up so we've seen some states put out their own stimulus programs recently are you expecting for that to have much of an impact on your comps or is it too.
Too small to really make.
And then the needle much.
Mike My guess is it's probably too little to move the needle a whole lot for us it's not that meaningful from what we've seen so far and what we're thinking.
Okay, great. Thanks, so much and best of luck.
One moment for our next question.
Our next question comes from Simeon Gutman with Morgan Stanley . Your line is open.
Okay.
Hey, guys. This is Michael Kessler on for Simeon Thanks for taking my questions Hey, Michael.
First I wanted to ask about.
Sales per foot sales per store in Q3.
We're a little bit below 2019 levels I know theres been some volatility throughout this year, but I'm just curious how you view that.
In the broader context.
Customer counts your loyalty.
Membership base.
I guess I don't have you would expect it to be higher or just because of the macro were.
We're in a period of depression or Alexander 19, despite some of it yes of course, we've had the prior two years any framing around that would be great. Yes.
Yes, Michael I think youre spot on with that the way we're looking at I think theres, obviously macro headwinds that we're all dealing with with regards to 19, where we were call it $99 $299 three <unk>.
<unk> 2019 from a comparable basis.
So just barely off if we would have to maintain the velocity of our sales.
Through the quarter without the last two weeks, we would've been somewhere in neighborhood of call. It 101 or something of that nature that we had planned to be.
So there is I think just macro pressures going on there.
Where that Raul rebuilding two and a lot of consumers under pressure. So we're navigating through that but I don't.
I'm not we're not coming out with a negative five negative turn negative 15, where we're in pretty good shape I think we're going to continue to see some momentum in our business as we move forward and go into 'twenty three so we're looking forward.
More so that the deal flow is strong and we have the right the right item the right deal to motivate the consumer.
Okay, Thanks, and follow up on that.
Supply chain cost and distribution transportation backdrop, it is easy and you mentioned that.
Can you size up I guess, when we might begin to see some of those benefits.
Through the P&L as far as you guys move into more contracts in the last year and the volatility is that something that we would expect beyond just the lapping of hub.
Kind of artificially lower cost this year beyond that just the actual reduction.
The easing in the back on how that might play out in 'twenty, three or is that more of a 'twenty four odd dynamic.
Yes, I think we're definitely seeing some easing in the supply chain costs, but with regards to the overall and we did obviously see a pretty large.
Improvement in the gross margin from Q2 to Q3.
It's about 600 basis points and supply chain. So we started to see the easing relatively speaking take place in the Q3 period. I think Q4 is just it's a moderate easing.
And then the big the big he's going to happen in Qs, one and two of next year.
I still think we're operating in the elevated supply chain cost at this point in time, just because all the vessels we had to make in wages in the four wall. So there is still going to be an elevated component there.
Supply chain costs aren't back down to where they were pre COVID-19. So we all have a little bit of elevation. There that I think is more permanent nature that we've got to get a little bit better on the merch margin to offset it.
I think Michael in terms of how restructure on the international transportation side, we very much like how restructured its been favorable.
For this contract season.
We like the market is.
A little more favorable as well a lot more favorable when you compare year over year. So.
The stars are aligning.
Well moving into 2023.
In terms of our business strategy.
Thank you.
One moment for our next question.
Our next question comes from Robert <unk> with J P. Morgan Your line is open.
Great, It's Matt boss at Jpmorgan, So John Hey, Matt comps.
So comps in the third quarter on a G on a three year geometric stack.
Negative fourth quarter guidance calls for a similar trend.
What exactly if you could maybe help US is the bridge from today's negative trend line and we have seen sequential improvement broadly with closeout inventory versus positive comps next year is it traffic will improve is it something with ticket do we need macro to improve just struggling with the with the bridge between.
The three year GM metric negative <unk> guided negative in <unk>, and then positive comps for next year with.
And it seems like closeout inventory having improved.
Yes, Matt the closeout inventory in the closeout opportunities definitely have improved I think the macro backdrop that we don't have the timing on yet is when does the trade down start to outpace the trade out of the lower income consumer So I do believe.
That's absolutely coming I can't tell you if it's coming here.
The end of Q4, if it's coming in Q1 of next year, but I do I do we have seen some of it start.
But I don't know exactly when it's going to kick in.
Our position to capitalize on it.
And I believe we're going on we're right on the cusp from our perspective.
We definitely have seen some improvement in the trends from Black Friday forward. So we're optimistic.
That we're starting to see some breakthrough, but obviously, we're not going to get ahead of ourselves at.
At this point in time, we wanted we want to see some some true numbers come out and I think we're there I think we will get there and I think we'll be there soon.
Okay, and then just a follow up on expenses, so implied SG&A rate in the AR.
It seems to be high <unk> this year.
How best to think about maybe puts and takes with SG&A wages and investments as we think about next year.
SG&A definitely is under pressure, Matt and has been our historical call. It 25% 25, 3% to five five.
It is definitely something I don't think we get back to at this point in time I'm looking more.
Probably <unk>.
26 ish percent in the SG&A front in 'twenty three going forward.
Maybe a tad bit higher but not much but it's definitely I think we will do better than this year.
What we're looking at so.
The pressures, we're dealing with on the wage front.
Utility costs are something we have to absorb and deal with.
Great Best of luck.
Thank you.
One moment for our next question.
Our next question comes from Paul <unk> with Citi. Your line is open.
Hey, Thanks, guys.
39% gross margin for next year is where you think you might shake out.
Curious how you think about the promotional environment that you will be playing in 'twenty three versus what you're playing in today.
And how you think about the sales gross margin trade off just from a high level perspective I guess.
Implicit in that 39% gross margin you've got you've got some sort of comp assumption curious what you think that is and just what happens how do you react.
Environment gets more promotional do you look to preserve margins or drive.
Yes, Paul we're obviously way.
We priced the way we go to market is we price below all the fancy stores.
Pretty big way, so the promotional activity doesn't.
Make us change to impact our margin as I was explaining earlier with regards even toys, we're shifting the timing of markdowns I don't think where we're shifting the increase of overall markdown rate.
Because we're already price strong and were just clearing more inventory earlier than later I don't think 2023 is going to be as promotional as this year has been but we'll be prepared for it if it does happen and we price off of the market. So if the markets being promotional.
We're going to be focused on that and our merchants are going to go to market with with knowing that there is still very active and we're going to price below that so we're always in everyday value. We don't play the high low game, obviously, and we give them the best price upfront and that builds loyalty with the customer. So I think that the value wins in the way we do our the way we run our business.
Got it thanks follow up on the market.
These four by which you talked about I think about it.
Part of the reason the gross margin fell a bit short.
The second quarter, but I'm curious if that buy performed as well.
This debate it and how much of.
The benefit on the margin side with the third quarter.
Versus the fourth quarter event.
Yes, the overall deal performed well, we're very pleased with the deal.
And we are excited how it performed and as I said earlier, it's not the end all be all there is a lot of deals we have in our pipeline and a lot of departments that performed very very well outside of these category. So but the deal was was strong definitely.
Impacted the margin in Q3, and obviously it has opportunities to impact the margin in Q4, so as I said in a few minutes ago is the shortfall in the margin in Q4 is not related to the merch margins all sit in the supply chain and deleveraging of fixed costs. So the margin I think is in good shape and we feel well.
We're in good position here.
Got it. Thank you good luck.
Thanks, Paul.
And im not showing any further questions at this time I'd like to turn the call back over to John for any closing remarks.
Over the past 40 years, we've grown to over 10500 team members, who are working harder than ever.
The holiday season places extra demands on our associates and I sincerely. Thank them all for what they do not only at this time of year, but everyday.
It's the combined experience passion commitment of the team that makes ollie's successful.
Thank you for your support of Ollie's as we say we are all A's.
Yes.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
The conference will begin shortly.
Raise your hand during Q&A you can dial one one.
[music].
Okay.
[music].
Okay.