Q2 2023 Ollie's Bargain Outlet Holdings Inc Earnings Call
[music].
Good morning, and welcome John Lee's bargain outlet conference call to discuss financial results for the second quarter of fiscal 2023. 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 reproduction of this call in whole or in part is not permitted without expressed written authorization of valleys joining us on today's call from Ollie's management, or John Swygert, President and Chief Executive Officer.
Eric vendor block.
Executive Vice President and Chief operating Officer, and Rob Helm, Senior Vice President and Chief Financial Officer certain comments made today may constitute forward looking statements and are made pursuant to and within the meaning of the safe Harbor provisions of the private Securities Litigation Reform Act of NIE.
95 as amended such forward looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Those risks and uncertainties are described in our fiscal 2022 Form 10-K, and fiscal 2023 periodic reports on file with the SEC and the earnings press release forward looking statements made today are as of the date of this call and we do not undertake any obligation.
To update these statements on today's call. The company will be also referring to certain non-GAAP financial measures reconciliation of those most closely comparable GAAP financial measures to the non-GAAP financial measures are included in our earnings press release with that I will turn the call over.
Mr. Swagger. Please go ahead Sir.
Thanks, Jonathan.
Yes.
Thank you and good morning, everyone. We appreciate you joining our call today.
We had a strong quarter and are pleased with the positive trends in our business. Our second quarter results were ahead of our expectations driven by strong comparable store sales.
And margin expansion.
In the quarter comparable store sales increased seven 9% and our adjusted EBITDA margin more than doubled to 12, 4%. This.
This marks our fifth consecutive quarter of positive comp store sales.
Given our better than expected performance in the second quarter and continued momentum in our business, we are raising our full year sales and earnings guidance.
Our sales strength in the second quarter was broad based with almost 70% of our categories Comping positive.
Our best performing categories included food summer furniture, Candy lawn and garden and housewares not surprisingly some of our softer categories, where hardware room air and furniture.
While record temperatures in July were favorable for aircrafts ourselves there was not enough to offset weaker sales from cooler temperatures during the first two months of the quarter.
Our recipe for success has always been selling good stuff cheap and delivering our customers extreme values every time, they step foot into one of our stores today.
Today shoppers are more savvy than ever and they are looking for great deals on brand name merchandise.
Consumers more focused today on stretching their budgets and making the most of their hard earned dollars.
All of these has been in the business of saving people money for more than 40 years.
We saw brand name products at drastically reduced prices with savings between 20% to 70% compared to the traditional retailers cut.
Customers know they can find a real brands and real bargains on products, they need and use their lives each and every day.
Suppliers know, we are a trusted partner for managing excess inventory and close outs are continued growth in many years, a closeout experience are leading to stronger binding relationships and better access to deals. We are seeing a growing availability of deals from both new and existing vendors.
While the pandemic resulted in challenges in supply chains increased shipping cost and created labor disruptions the environment has become more normalized today.
Manufacturers are once again, creating new and innovative products changing packaging sizes and retailers are reducing inventory levels to account for changing consumer demand.
This has made for a very strong closeout environment.
Outside of the deal. So we've made investments in our people supply chain and realigning some of our marketing efforts all of which are driving better execution across the organization, providing our customers an even more exciting shopping experience.
Eric will speak to these in a moment all of which are driving our strong performance and we feel very good about our ability to return to our long term algo of double digit sales growth, 40% gross margin and double digit EBITDA growth.
Pass the call over to Eric to discuss our strong growth and operating initiatives.
Thanks, John and good morning, everyone.
We opened six stores during the quarter ending with 482 stores in 29 states.
Quarter to date, we have opened an additional 10 stores, bringing us to a store count of 492.
We are tracking to our 45, new store target. This year. Despite the continued challenges in real estate and construction.
We are also making progress in our remodel program completing seven stores during the quarter, bringing us to 14 stores to date and we are on pace to achieve our plan of completing 30 to 40 Remodels this year.
Our customers deserve and updated shopping experience, which showcases our tremendous value and we are committed to the remodel program going forward.
John touched on the strength of our deal flow and we are equally focused on driving productivity improvements throughout the organization.
We are continuously making process improvements to help manage costs and improve our margins over the long term.
Running a closeout business is unlike any other traditional retail business. This model is full of inconveniences and challenges and we are built for it.
Our extensive buying and closeout operating experience is a strategic differentiator for us.
Yes.
On the marketing front, we updated the format of our print ads earlier. This year, we transitioned from our primary format of an eight page flyer to a more streamlined version.
We believe many customers were only focused on the front and back pages of the fire.
This new format allows us to showcase our very best deals and communicate a stronger call to action.
Our narrower assortment in the fire also simplifies execution. It makes us more nimble across many areas of our business, including buying supply chain and store operations.
It is also a better customer experience as key AD product features are more prominent in our stores and therefore easier for customers and associates to locate.
We also launched the new visual design of our adds a few weeks ago.
The new creative is designed to make it easier and faster for customers to see and respond to our great deals extreme values and unique shopping experience.
We continue to broaden our reach through alternative forms of marketing such as digital media, social Influencers and even our first broadcast media tour featuring the more SaaS, a well known consumer correspondent who provided content that was carried on television radio and online <unk>.
The video segment ran in over a dozen major markets and generated a significant number of impressions.
Turning to supply chain, we recently completed the expansion of our Pennsylvania distribution center, which enable us to service an additional 50 to 75 stores.
We are also in the process of building our fourth distribution center in Illinois, which is expected to open in fiscal 2024. This will provide us the capacity to service an additional 150 to 275 stores.
Supporting the next leg of our new store growth in the Midwest. These investments will enable us to service between 707 hundred 50 stores from our distribution network in support of our long term target of 1050 stores or more.
The strong deal flow along with improvements, we are making in marketing stores and supply chain position us well for profitable growth as we continue to scale our business.
Before it over to Rob.
I would like to thank our entire ollie's team. It takes each and every one of us to make this business a success, we have the most talented and hardest working people in this business who are passionately committed to winning day in and day out. We appreciate all you do.
Rob.
Thanks, Eric and good morning, everyone. We're pleased with our strong performance in the quarter and continued momentum in our business. Our results came in ahead of our expectations driven by better than expected comps and solid margin expansion.
Based on our strong performance and continued momentum we are raising our sales and earnings guidance for the full year.
For the quarter net sales increased 13, 7% to $515 million driven by a seven 9% increase in comparable store sales and new store unit growth or.
Our comp store sales growth was driven primarily by transactions.
Ollie's Army increased four 1% to $13 5 million members representing over 80% of ourselves.
During the quarter, we opened six new stores ending with 482 stores in 29 States. We are pleased with our first half performance of our new stores.
While early as a group these stores have performed above plan to date.
Gross margin improved 650 basis points to 38, 2% in line with our expectations, driven primarily by favorable supply chain costs as well as higher merchandise margins.
SG&A expenses as a percentage of net sales was flat to last year at 26, 2%.
As a reminder, we did not accrue for incentive compensation expense a year ago based on performance versus plan.
Excluding incentive compensation expense, we levered SG&A by approximately 40 basis points.
Operating income increased 218% to $53 million and operating margin increased 650 basis points to 10, 2% in the quarter.
Adjusted net income increased 205% to $42 million and adjusted earnings per share was <unk> 67.
Compared to <unk> <unk> last year.
Adjusted EBITDA increased 147% to $64 million and adjusted EBITDA margin increased 670 basis points to 12, 4% for the quarter.
Turning to the balance sheet, our cash position remains strong with $310 million between cash on hand, and short term investments and no outstanding borrowings under our revolving credit facility at quarter end.
Inventories increased 1% to $498 million.
Primarily driven by new store growth, partially offset by the benefit of lower capitalized freight costs and normalization of lead times on our in transit inventory.
Adjusting for these items, our inventory increased 5%.
Capital expenditures totaled $26 million in the quarter and were primarily for the development of new stores remodeling of existing stores and the completion of our Pennsylvania distribution center expansion and the construction of our new distribution center in Illinois.
During the quarter, we bought back 277000 shares of our common stock for a total of $17 million at.
At the end of the quarter, we had $109 million remaining on our current share repurchase authorization.
We are committed to returning capital to our investors through share repurchases, while balancing our strategic growth opportunities and working capital needs.
Turning to our outlook for the full year, given our strong first half performance and continued positive trends in our business. We are raising both our sales and earnings outlook for fiscal 2023.
For the full year, which includes a 50 <unk> week, we now expect.
Total net sales of 2.0 76 to 2.0 91 billion.
Comparable store sales growth of four to four 5%.
The opening of 45, new stores left one closure.
Gross margin in the range of $39 one to 39, 3%.
Operating income of $212 million to $219 million.
Adjusted net income of $165 million to $170 million.
And adjusted net income per diluted share of $2 65 to $2 74.
And annual effective tax rate of 25, 1%, which excludes the tax benefits related to stock based compensation.
Diluted weighted average shares outstanding of approximately $62 million.
And capital expenditures of approximately $125 million, including $75 million for the construction of our fourth distribution center and the expansion of our Pennsylvania distribution Center.
Lastly, let me provide some commentary on our expectations in terms of the quarterly flow for the balance of the year.
Based on the underlying trends in our business, we are confident in raising our third quarter comparable store sales expectation from flat to a positive 2% to 3%.
This includes one less advertising flyer in the quarter, which shifts out of the third quarter and into the fourth quarter.
We estimate the ICF could negatively impact our third quarter comp store sales by approximately one full percentage point.
With the ever changing nature of our product assortment, we are leaving our comp store sales expectation for Q4 unchanged for now with comps expected slightly higher than our long term algorithm of 1% to 2%.
Looking at new store openings, we expect to open approximately 23, new stores in the third quarter, which will result in a significant step up in Preopening expense. We've opened 10 stores so far in the third quarter.
Finally, our gross margin expectations for the back half are unchanged gross margin will follow a more normal seasonal pattern. This year, which calls for slightly higher gross margin in the third quarter and slightly lower gross margin in the fourth quarter we.
We expect much more modest year over year gross margin expansion for Q3, and Q4 compared to the first half as we lap more normalized supply chain costs in the back half of last year.
Now, let me turn the call back over to John Thanks, Rob.
In closing I would like to thank the entire ollie's team for everything they do we operated very unique business that requires dedicated team members who work extremely hard to make all of these are special place for everyone.
Our teams are doing an incredible job buying deals assisting our customers and keeping our stores well stocked and merchandise.
Everyone has a part in our success and we are grateful to our family of more than 11000 team members as we say we are.
Yes.
That concludes our prepared remarks, and we're now happy to take your questions operator.
Certainly and ladies and gentlemen, if you do have a question at this time simply press Star one one on your telephone. If your question has been answered and you'd like to remove yourself from the queue simply press Star. One again, our first question comes from the line of Brad Thomas from Keybanc. Your question. Please.
Hi, good morning, and congratulations on the strong second quarter here.
Thanks, Brad I wanted to just talk.
John I wanted to talk a little bit more about the closeout availability and the momentum you have as you go into the back half of the year.
As we think back to 2022 of course, you all had some record buys that you are announcing as being some of the most exciting in the company's history can you just help us think about not only the momentum and what youre seeing out there right now versus how comparisons sort of factor into how are you.
Youre thinking about the back half.
Sure Brad obviously, you know we've been doing this a long time, we've been buying deals for over 40 years. So that's what we do.
Deal flow is always pretty strong for ollie's.
Because of our relationships and what we've been able to develop over the years. We do have we've always say we have deals all the time, but sometimes deals are hard to annualize year over year and quarter by quarter, but the flow that we're seeing and have seen thus far. This year has been extremely positive last year, we had the fancy store deal.
That came out in Q3 and into Q4.
We obviously know we have a pretty good idea of where we're sitting right now for the third quarter and the deal flow, we've seen and we're pretty comfortable to go up against that deal that we had last year and obviously you know it's not standard for us to raise numbers.
Our long term out of one to two and we're going out with a two to three with an ad shift.
And out of about a full percentage point out of the quarter. So we have the momentum in the business that makes us feel pretty comfortable where we're sitting today and the deals are coming in they're broad based Brad we're seeing it everywhere.
So we're in a good position.
That's really exciting and if I can ask a follow up on the margin outlook, Rob I believe you reiterated the gross margin outlook for the back half I guess, just as we start to think about 2024, you've talked about getting back to that 40% gross margin in broad strokes.
John aircraft, maybe you could talk a little bit about how youre thinking about the margin outlook for next year.
I'll take that one it's Rob.
So yes, we reiterated the guidance of 39, 1% to 30 93.
Think about the year. The first half certainly was burdened by a higher rate of supply chain cost in the second half will be so when we get to Q4. This year, we believe that will be very close to our long term algo of $40 million.
I believe that for next year entering the year, we will be positioned to be.
An algo for 'twenty four.
Great. Thank you very much.
Thanks, Patrick.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Peter Keith from Piper Sandler Your question. Please.
Hey, good morning, everyone I'll give my congratulations on a great quarter as well.
So John you are talking about the business.
Kind of returning to algo overtime I guess on the heels of this just has such a spectacular comp quarter.
Kind of returning to algo overtime I guess on the heels of this just has such a spectacular comp quarter.
Hard to predict next year, but how do you think about returns algo and 24.
Just kind of lapping this type of environment do you think thats possible or too hard to predict.
Yes, Peter I feel pretty good about being able to return until our long term algo in 2024.
The obviously this is what we do the deals are going to be in there next year as well and as long as we execute we actually consistently I think we'll be able to comp the comp.
I think the the long term algo of one to two is appropriate for.
Comp store sales perspective, and then double digit sales and EBITDA growth I think are built into how we plan to grow the model. So I feel pretty comfortable where we're sitting today going into 2024 that we can execute.
Okay, Great and my follow up then is just.
Just kind of trying.
Trying to parse out the backdrop versus the execution improvement I know, it's probably hard to do but I guess, focusing specifically on condensed the Flyers I think thats an interesting change is.
Is there any way to quantify or think about.
Maybe just anecdotally that driving any sales benefits that perhaps have some sustainability.
I think thats very very very hard to parse that out and be able to break down and quantified the difference of the items and what we're trying to do here. So I do believe that it is a positive.
It does have a positive impact, but I don't I met at all to break that out for you.
Peter It's Eric I would answer the question, it's a 100% execution.
I'm, just kidding I'm joking the.
The Flyer changed we did test the flyer change we ran.
Two.
Pretty robust test supplier change and we saw really no no difference between the formats. We think ultimately long term. This format is more compelling.
When we show our customers are great deals it drives excitement traffic. So our absolute best deals shown on this fire are doing that in certainly our results to date have proven that we've been at this now for two quarters.
We're very happy with the results.
Okay sounds great guys. Thanks, so much and good luck.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Edward Kelly from Wells Fargo. Your question. Please.
Hi, guys good morning.
Good morning, Jonathan.
That you could talk a little bit more about the deal pipeline.
I saw in your most recent buyer it looks like it had a calming buyout.
Just kind of curious is that how you're teed up.
Sort of like into the back half of the year and visibility on.
Holiday and then as part of this question there I think there's been concern from investors that in 24, you will start to lap that more normalized.
Deal environment that is for you right like you talked about continued deal flow, but it's been very good.
Any thoughts on like a stronger for a longer buying.
Buying cycle.
To what we're seeing at retail and the opportunity there even into next year.
Yes, Ed I think theres still a lot of opportunity that's left out there in the marketplace I don't know when.
And when theres going to be a step change, but I can tell you we've been and it's hard to be able to get their hands around what we've been doing this for a long long time.
And with our size and scale and we're becoming very very meaningful to the vendor community I don't foresee us having a huge problem lapping the deals that we're dealing with we work hard each and every day to continue to foster those relationships. So that's what we do that's how we operate this is the model we work and then our merchants strive each and every day to <unk>.
Beat their numbers year over year. So next year do I expect to have an outsized comp nope I expect to have a normal normalized comp number that we'll be able to go up against and will build over the numbers and we will continue to execute and that's what we've done we've done that for over 40 years. So we had two rough years here in the past with the.
Covid issues that were out there, but where we believe the model is very very sustainable the deals arent going to just dry up tomorrow in terms of visibility you know, we don't have a ton of visited visibility out there in terms of the next 90 to 120 days, but the momentum we're seeing right now is very strong we feel pretty confident we're sitting we didn't change the Q4.
Guidance for that reason, because we want to make sure we clear Q3, and therefore, we were running hot in Q Q4, we'll let you know, but there's very very few people that are doing this in the world today at the scale, we're doing it. So it's we're in the right position.
<unk>.
As Eric said, we're built for this this is what we do and this is what our merchant team and our supply chain team deal with each and every day and it is inconvenient business and a lot of traditional retailers don't want to be in this and it's not for the faint at heart.
Okay, and just a quick follow up on shrink shrink has been problematic for most retailers I don't think you mentioned that.
Can you talk about what Youre seeing there numbers. Thank you.
Do the.
Okay.
Hey, This is Rob we did not mentioned in the call.
There are a couple of things I'm sure Inc. First shrink for us is a relatively lower percentage than some other retailers. So we're just a low shrink model and I think thats important site.
The second piece is we count throughout the course of the year. So we got a good read on this growing shrink trend at the end of last year, and we were pretty sober when we thought about coming into the year in terms of our guidance.
As well as mobilizing our efforts.
To date.
Shrink is has leveled off for us a little bit it's not any worse, but it's not significantly better and we continue to work at it.
Our local and regional basis, and those stores that are impacted.
Yes. This is Erik just to just to add it is a hyper local issue for us relatively small percentage of our stores say under 10% of our stores that contribute over half our shrink.
So that makes it a little bit more manageable for us we can direct a lot more attention and resource and have directed a lot more attention and resources into the 10% of the stores that are that are causing the problem.
Which helps us to get our arms around it.
Alright, thanks, guys.
Thanks, Ed.
Thank you one moment for our next question.
And our next question comes from the line of Randy <unk> from Jefferies. Your question. Please.
Yes, Thanks, guys and good morning, maybe Eric lets go back to commentary around the real estate landscape and maybe give us some perspective on how we should be thinking about unit growth next year, and maybe give a little bit of color on what youre seeing around construction cost around just cost are they starting to come down.
<unk>.
B to build starting to pick up a little bit or are things getting easier out there I just wanted to get a sense of where things are on that front. Thanks.
Sure sure Randy Let me take the real estate question first it is a tight real estate market.
But we do like what we're seeing in terms of distressed retailers store closing closings bankruptcy filings.
This should open up opportunities we've been very active in.
In pursuing real estate, that's coming out of this opportunity with bankruptcies in particular.
Participating in bankruptcy processes in auctions.
To date, not many locations and materialize out of this but we feel very good about the pipeline and where we're sitting tipping.
Typically it takes a bit of time for locations to be vacant before ollie's becomes a tenant of choice.
But we have a very strong balance sheet and a very high traffic model thats great for co tenants in any center.
We feel very good about where we're positioned.
We're not giving guidance for 2024 at this time.
We do think 50 is realistic, but we're not giving that as the official guidance until we.
Guide the whole year, and then in terms of construction.
It continues to be a challenging environment in construction elevated costs lead times.
Our challenge, whether it's HVAC or local inspection related.
Issues or bandwidth contractors, it's it's all still a challenge, but we're pushing hard we control what we can control.
We have a better handle on lead times now than we did a year ago. So we feel confident that we can deliver the 45 stores you've committed to in.
2023.
Got you Okay Super helpful. And then I guess John in the past.
Talked about some labor costs being a pain point, particularly around D. C around the Dcs with competitors with other Dcs kind of taking.
Some of that labor way in some respects maybe can you give us maybe your perspective on that.
Where we are in the labor cost front and then just maybe also maybe Rob you could remind us when when Dcs have opened up in the past I think theres been a little bit of deleverage because of them ramping up.
You said that the DC in Illinois is going to open up next year, just maybe give us maybe frame out again, we really don't need next year's guidance, obviously, but it would just be helpful to understand different things to be thinking about around labor and then the DC opening up next year as I think the market pretty much feels like this year is locked in and just thinking through how we should be thinking about high level for <unk>.
Thanks, guys sure sure Randy It's Eric I'll take the first part of the question and Rob can take the second.
We have made meaningful investments in wages over the past couple of years.
In our Dcs, we actually recently made investments in all three Dcs in wages our candidate flow is very strong.
Our turnover in the first 90 days of employment remains high so we still do churn people.
So.
Yes.
Rob you want take the second part.
Sure from a distribution center perspective, when we opened distribution centers. It historically was.
I would say 50 basis points or lower however, as we scale, we're getting further along in terms of the scale of this business I would expect.
Call. It 10 to 20 basis points in the back half of next year, which we should be able to offset with self help.
Yes, it's probably important to add that the wage investments. We've made to date are budgeted wage investments included in our guidance assumptions.
Yes, that's super helpful. That's what we need thanks Scott.
Thanks Randy.
Thank you one moment for our next question.
And our next question comes from the line of Jason Haas from Bank of America. Your question. Please.
Hey, good morning, and thanks for taking my questions can you talk about what the drivers are that get you from.
A little bit over 39% gross margin this year too it sounds like you expect you could be at 40% next year and beyond so can you just talk about what those drivers already out there.
Hey, Jason it's really a supply chain story, so for this year the supply chain on a full year basis.
As closer to 10% of sales.
It being front half loaded and above 10% for the front half.
Q4, being below 10% as the call back to our algo.
<unk> historically did a 7% to 8% supply chain cost.
We don't anticipate that we'll be able to get back there.
We have made the wage investments that we just discussed there and the last question that will have an impact.
Domestic fuel is still not back to pre pandemic levels. So thats, a tiny bit of a headwind, but if we get back to the eight 5% to 9% range that gets us all over the.
The 40% gross margin.
Got it that's great and then Robin other follow up for you on margins.
I think given the strong comp that you reported I think people, maybe thought we'd be a little bit better flow through on SG&A. It sounds like the big offset was incentive comp do I have that right is there any other areas that <unk> been investing in that maybe offset some of the flooding.
You would've seen that shrunk comp.
No thats right incentive comp was roughly 40 basis points of pressure in this model, we would estimate too.
To lever by about 10 basis points for every every.
Point of comp over 3%, so we feel pretty good about it.
Got it that's great that makes sense. Thank you.
Thank you one moment for our next question.
And our next question.
Comes from the line of Eric Cohen from Gordon Haskett. Your question. Please.
Hi, Good morning. Thanks, I just wanted to follow up on that last answer you said that you can get 10 basis points of leverage for.
Every 100 basis points above 3% comp at least historically, it's been one to two 1% to 2% comp. So just curious what has changed to the 3% now.
I would say I would say that the leverage point Youre correct is closer to two.
It was it was one and a half of it is.
Wage investments have increased within SG&A, it's closer to do.
Okay. So I think unless like you said it.
It would be 3% or is that just for this year, that's not the new auto going forward and then I assume.
No.
Okay.
And then just also wanted to ask on <unk>.
You made a comment early in Panama.
New stores are producing above plan it looks like new store productivity came down this quarter and just looking at the revised guidance at the midpoint sales he raised by 1%.
<unk> raised by 200 basis points, so curious sort of how to reconcile that.
New store productivity was lower than the first quarter as planned the timing of new store openings.
The impacts that the way that the math is calculated by the analysts can EDI.
As a group we are very happy with our 2023 openings there.
Performing well above plan.
Okay.
Does that answer your question.
Yes. Thank you.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Jeremy Hamblin from Craig Hallum. Your question. Please.
Thanks Glenn.
Grant's on the strong result.
I wanted to ask about the remodel program and you've talked about 30 to 40 Remodels this year.
<unk>.
You still have a very strong balance sheet here over three $300 million.
Some of the buybacks that you've done.
Wanted to understand in terms of capital allocation.
But you're not quite ready to guide new stores for next year, yet, but pipeline filling up wanted to get a sense of the remodel program is that something that you think could potentially accelerate.
Are you still gain.
Nice mid single digit.
With.
Is there any change in terms of what the cost of those remodels.
Right.
And which I think previously you had talked about 125000 to $200000.
Sure Jeremy it's Eric I'll answer the <unk>.
Very happy with our remodel program.
To date.
The cost has not changed it's still in that range of 125 to 200.
200000.
We were not guiding 24, like we werent guiding on.
New stores, either but it's realistic to expect a similar range in terms of what stores. How many stores were remodeled 24 as we do in.
23, so it's in that 30 to 40 range.
And the customer response has been very very positive and we have similar expectations going forward in terms of return on the investment.
Great and then last one for me here.
With the.
Illinois, DC rolling out next year.
In terms of plan then for after that.
What are you looking at in terms of timing for when the next DC might look like and geographically.
How are you thinking about that.
Sure.
We're looking probably several years out for the next DC three plus years.
We're going to sweat the assets that we have in place with the <unk> two.
Kind of close to the limit the location of the D. C will be in in the west somewhere so we havent determined.
Although we've done some modeling around it so we're preparing for it we haven't determined exactly where on the map it will be but.
Somewhere in the West and Jeremy one takeaway that we don't normally talk about too much is the D. C. Two of our Dcs that we do have or will have Illinois, and Texas, they're both expandable as well. So we can add capacity to them just like we did in New York D. C. So that's another avenue, we have like like Eric said to sweat that asset so.
Alright.
About right.
Whoa.
Reverb.
Sure.
Operator, we've got a lot of.
The feedback here on here.
Yes.
Can you speak again.
Hello.
Can you hear US yes, yes, I mean to the open line of the I think it was coming from our participant there.
Okay.
Okay great.
We're just going to add.
One small little point, whether it's a fiber D. C store network network is still something we.
Debate at our.
Maturity of 1050 stores.
Thank you one moment for our next question.
Our next question comes from the line of Matthew Boss from Jpmorgan. Your question. Please.
Thanks, and congrats on a great quarter.
Thanks, Matt.
So John larger picture could you elaborate on customer behavior that you're seeing across the box I think it's really two things that we've talked about in the past maybe could you speak to trade down activity that Youre seeing and then the second piece is the trade out headwind that I know you spoke to a year ago, where that stands today and then just.
Any comments on August trends or continued momentum in the business.
Yes, Matt I'll, let Eric take the.
First question and then Rob can pipe in on the second one.
Sure. Thanks.
We are continuing to see a trade down to the higher income customer defined at 75000 or greater so we are continuing to see that momentum it's similar versus the prior two quarters.
Our new <unk>, new customer acquisition is continues to be very strong.
Actually, especially in the 100 plus thousand dollars.
Income cohort so were seems to indicate that those customers in that income cohort are really looking for value or they need value.
And then in terms of the trade out the lower income.
Consumer that we would.
We would say is under 40000 and household income.
I'd see that cohort index down slightly in Q2 versus other quarters keep.
Keep in mind, Matt that we underpenetrated in low income consumers.
Not a concern than it was ever so slight.
Our largest new customer growth is coming from the 100 to $150000 cohort specifically.
And from a current business perspective, we're pleased with our positive momentum we feel like there's great deal flow right now and there's great content in our store and our customers are responding accordingly, we're comfortable with the guidance that we gave.
Great and then just a follow up on on new stores could you elaborate on the performance that you're seeing from the most recent openings and then.
John maybe for you as the fleet continues to scale.
Maybe if you could walk through how are your relationships with larger manufacturers changing and maybe brand awareness with customers evolving.
Yes, Matt with regards to the vendor community and the manufacturing community as we continue to scale and we have more notoriety in the business. It continues to get stronger and stronger and more opportunities continues to open up for us and the one thing we do and we focus on each and every day our merchants are.
Trained.
To build relationships and really its a relationship business. This is not a one transaction business for from our perspective, we want the first deal, but we want all the other deals that come along with it. So building that relationship is key and the brand manufactured the brands are.
Most of the brands that work with us continuing to come back and they feel very comfortable with how we respect their brand and we do what we say, we're going to do and they're very comfortable.
Never find good they've sold to all of these on the market outside of <unk>. So.
We really don't we do our best not to give them any channel conflicts with other retailers out there.
Great Best of luck guys.
Thanks, Matt.
Thank you one moment for our next question.
And our next question comes from the line of Scot Ciccarelli from tourists to your question. Please.
Good morning, guys.
On the call. John You said, 70% of your categories were positive I think I recall from ancient history at one point, you're talking about how it's even 50% of your categories comp positive that would be good performance. So.
Is that 7% figure an outlier on the upside and if so how often do you see broad based strength.
Yes, 70% of our departments Comping positive Scott is definitely a positive, especially in the environment. We're living in today discretionary income inflation and the consumer being a little more scrap than normal.
I would say, that's an outsized performance and an outsized response the deals that were given to the customer execution at store level.
50% is what we normally see in terms of the departments Comping positive. It's just the number though I mean, it doesn't really tell you everything but it is an indicator that we're hitting on all cylinders and obviously with the 7.9% positive comp for the quarter. It gives you some indication.
Okay that makes sense and then the incentive comp into Q was there some sort of true up or will we have additional kind of pressure on SG&A from incentive comp in two H.
Last year as we.
Underperform versus plan, we did not record incentive compensation starting in the second quarter.
The accruals in the third quarter were also wide relative to historical incentive compensation expense level. So the expense pressure will step up in the second half.
We call the 40 basis points in the second quarter, it's probably closest closer to 50 basis points of pressure for the second half.
With Q4 being a little more pressured in Q3.
And I think Scott the one takeaway that's all baked into our numbers that we guided for the full year. So that's not incremental to what we've already guided to.
Got it okay. Thanks, guys.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Mark Carden from UBS. Your question. Please.
Good morning, Thanks, so much for taking the questions. So to start another question on shopping trends are you seeing many repeat trips from that 100 to $150000 income cohort you talked about.
Signing up for Ollie's Army at rates that are comparable to what you see across your customer base basically do you see your core demographic expanding much.
Thanks.
We do to answer all your questions yes.
Repeat repeat visits a little bit hard to track it maybe a little early in this trend with the trade down customer to be able to answer that with certainty.
But they are signing up for Ollie's Army.
We would expect there to be some stickiness there.
Okay, Great and then just as a follow up throughout the quarter did you see much of a shift in terms of sales cadence.
As it progress just given some of the era of intensifying compares.
Sure. This is Rob from a quarterly flow perspective may.
Pretty much the same CSL philosophy, we saw coming out of the first quarter June ticked up a bit July was the strongest month of the quarter as the.
Really warm temperatures.
Supported our AC sales of that.
Alright, great. Thanks, so much good luck guys.
Thanks Mark.
Thank you one moment for our next question.
And our next question comes from the line of Kate Mcshane from Goldman Sachs. Your question. Please.
Hi, Good morning, just a quick question from us.
Back to the sales growth during the quarter.
Primarily it was driven by transactions as you mentioned, but can you talk to ticket during the quarter and how you see that playing out for the back half of the year.
Hey, Jay this is Rob transactions, primarily drove it it was probably about 85% of the comp.
The remainder of the comp was basket, which was up low singles.
Thank you.
Thank you one moment for our next question.
And our next question comes from the line of Simeon Gutman from Morgan Stanley . Your question. Please.
Hey, Good morning, guys first quick follow up on shrink can you tell us what the timing of your physical inventories how quickly or how often are frequently are you doing them and I think to summarize what you said it got a little bit better than what you were run rating prior to this quarter.
Sure. This is Rob we count our store fleet throughout the course of the year.
We're about halfway through the year, we've counted about half the stores.
From a shrink perspective, we are slightly better.
Not significant enough to call out is the impact within our gross margin from second quarter.
Okay, and a quick follow up back on the sales strength.
Given that traffic is strong it seems like the consumer is moving towards value and I think we've seen that.
Curious, how you kind of weight the strong performance between the merchandising and the success of the closeout merchandise.
Against that customers seeking maybe the channel and value a little bit more.
Yes, I think so I mean, that's.
<unk>.
Bifurcate, what that is but I would tell you the the deals drive the customers to respond in.
And the value we offer to the customer so right now theyre looking for the deals we have some great deals and great brands in our stores and they're responding to what we're giving you as you can tell with our top five categories. It's not all consumable theres some lot of discretionary and there was some or furniture.
Lawn and garden coming through so they're there they're responding to what we have we're able to show them what the great values were given to them. So that's number one key.
Regardless of what's going on in the marketplace.
Yes, Okay nice quarter good luck.
Thank you thanks, David.
Thank you one moment for our next question.
And our next question comes from the line of Paul Lajoie from Citi. Your question. Please.
Hey, Thanks, guys I'm curious, if we could talk a little bit more about the better gross margin rate in the second quarter, how much was from lower supply chain costs versus merchandize margin improvement and within that merchandize margin improvement how much was driven by better buying our initial markup versus just having lower.
A motion and then second on the store opening plans for F. 'twenty for how many stores do you already have locked and loaded for next year. Thanks.
Thanks, Paul This is Rob from a gross margin perspective.
Out of the 650 basis points of expansion supply chain was roughly 550 basis points merchandise margin was about 100 basis points.
Net of the impact of shrink.
The lion's share of that improvement was improved deal flow and better IMU on our buys.
Versus the.
Reduced promotions.
Okay.
Hey.
I refer you to the stores.
Yes, we wouldnt, we wouldnt answered that question, it's maybe a little too detailed we're not speaking to 2024 guidance. So.
I indicated that 50 stores is realistic for 2024 and.
So that's.
<unk>.
That's what we will give you more on.
Future calls, but with regards to you know obviously, we do we take second generation side. So we're not building so our lead times a lot less but we don't want to give any 2024 guide right now I think the reality is around 50 stores for next year.
Got it thanks good luck.
Thank you thanks for that.
This does conclude the question and answer session of today's program I'd like to hand, the program back to John Swygert for any further remarks.
I would like to thank everyone for their time and interest in <unk>, we feel very good about our positioning in the back half of the year and look forward to updating you on our continued progress on our next earnings call. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
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Okay.
Okay.
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