Q2 2024 Ollie's Bargain Outlet Holdings Inc Earnings Call
Good morning, and welcome to Ali's Park in Outlet Conference, called to discuss
Financial Results for the second quarter of fiscal year 2024. Currently all participants are in a little synony mode. Later we will conduct a question and answer session and interactive instructions. We'll 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 express written authorization of allies.
and joining us on today's call from Ali's Management, our John Swygert Chief Executive Officer, Andrew.
Speaker Change: Eric Vander, Volk, President, and...
Robert Helm: Robert Helm, Executive Vice President and Chief Financial Officer, certain comments made today may constitute for looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the private securities litigation reform act of 1995 as amended.
Robert Helm: Such for looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to different materially from such statements.
Robert Helm: Those risks and uncertainties are described in our annual report on Form 10K and quarterly reports on Form 10Q on File with the SEC and the earnings press release.
Robert Helm: For looking statements made today are as of the date of this call and we do not undertake any obligation to update these statements
Robert Helm: Today's call, the company will also be referring to certain non-gap financial measures.
Robert Helm: Reconciliation of those most closely comparable gap financial measures to non-gap financial measures are included in our earnings press release. With that said, I'll now turn the call over to Mr. Swygert. Please go ahead, sir.
Mr. Swygert: Thank you, and good morning everyone. We appreciate you joining our call today.
Mr. Swygert: We are extremely pleased with our strong performance this quarter with better than expected sales and earnings. Our customers continue to respond to our amazing deals that we are executing our model at a high level.
Mr. Swygert: Our comparable store sales increase of 5.8% was well above our expectations and was driven by increases in both transactions and basket.
Mr. Swygert: Our room air and housework departments were the two big standouts in the quarter, but we also continue to see strength in sporting goods, food and candy.
Mr. Swygert: Food, candy and sporting goods have been leading categories for some time and these are all good examples of how strengthening our vendor relationships with major manufacturers continues to drive consistent product flow of compelling deals.
Speaker Change: Consumers are seeking value, and this is driving growth in the discount and off-priced channels. The bigger retailers are gaining share and the larger manufacturers who supply them are competing for shelf space. Retellers are continuously updating their product offerings and manufacturers are supporting this by introducing new products in packaging.
Speaker Change: as a result.
Speaker Change: There is a constant availability of products and inventory across the supply chains and this provides additional opportunities in the close-out market.
Speaker Change: Consolidation on both sides of the aisle has led to more product flow, higher levels of excess inventory and a larger close-out industry. Some very large retailers have gone out of business in the past several years and the stakes for those remaining are getting higher.
Speaker Change: While the close-out industry continues to grow in size, the number of large scale buyers of this for this product continues to shrink.
Speaker Change: Our size, scale, and over 42 years of industry experience is a real strategic advantage in this is fueling our growth. Anyone can sell cheap products these days, but our true value proposition is selling good stuff cheap.
Speaker Change: We sell nationally branded products that people need and want at prices typically 20 to 70% below the fancy stores. Real Brands, Real Bargains has always resonated with customers and we don't think this will ever go out of style.
Speaker Change: We completed the quarter with 525 stores across 31 states.
Speaker Change: Our longer-term target is more than 1300 stores across the United States. To support our continued growth, we have invested in people, processes, marketing, supply chain, and information technology. All of which have led to better and more consistent execution.
Speaker Change: The proof is in the strength and consistency of our results.
Speaker Change: 9 consecutive quarters of comparable store sales growth, a return to a 40% annual gross margin.
Speaker Change: and adjusted E-bedda margin in the low teens.
Speaker Change: and the ability to opportunistically accelerate new store openings without sacrificing execution of the business. The 99 cent only store transaction was one of those opportunities and there are potentially others on the horizon.
Eric Vander: Our team is ready for such opportunities The operational improvements that Eric in the team have made up and down the business have enabled us to be more nimble, more nimble organization, and I have never been more confident in our ability to drive profitable growth.
Eric Vander: We are well positioned to continue executing the high level and winning into the future.
Eric Vander: We announced a number of executive promotions and appointments on our last earnings call that position us for continued long-term success.
Eric Vander: With the team in place in the transition progressing, the plan is to pass the CEO responsibilities to Eric in early 2025. Eric will play a more visible role on these calls and investors events going forward. With that said, is my pleasure to turn the call over to Eric.
Eric Vander: Thanks, John, and good morning, everyone.
Eric Vander: Our strong second quarter performance is the result of our great deal flow and the strong execution of our team. The process improvements in investments we have made in our people, supply chains, stores and marketing continue to pay off in a form of better productivity and consistent financial results.
Eric Vander: is John alluded to, this is also made us a more nimble organization, capable of working through exogenous challenges and opportunities.
Speaker Change: The collapsing of the Baltimore Bridge was a tragic event that could have been catastrophic to our business, given this is what our most important ports of entry. However, we were able to quickly reroute ocean containers with minimal impact to the business.
Speaker Change: The same goes for the recent rise in ocean shipping rates. When negotiated or annual contracts in early May, slightly below budget, despite the short-term spike in rates, we've been able to effectively move products while delivering against our gross margin targets.
Speaker Change: The startup of our fourth distribution center is another significant event that we have methodically planned and executed over the past several years.
Speaker Change: Located in Princeton, Illinois, this facility was open on time and on budget. We began shipping products to stores in LHOI, and we are very pleased with its performance.
Speaker Change: This facility was a big undertaking in every associate who worked on this project deserves a huge congratulations and thank you. The new facility has a number of technology and productivity enhancements that will help the scale and increase productivity over time.
Speaker Change: This new distribution center sets us up for continued growth in the Midwest, and we now have a capacity to service up to 750 stores in total.
Speaker Change: On our last earnings call, we talked about the acquisition of a number of 99s and only stores and our ability to take advantage of this opportunity by prioritizing the opening of these stores and accelerating our store growth over the next 18 months.
Speaker Change: The majority of the 99s and only stores will open in September and our team did a fantastic job of reprioritizing around these grand openings.
Speaker Change: Texas is a great market for us, and one where we still have tremendous growth opportunity. These stores are the right size, located in good trade areas, have attractive occupancy costs, and have an established base of value oriented customers. They will only strengthen our presence in key markets across the state.
Speaker Change: There's been a recent uptick in a number of store closures and we are positioned to make the most of these opportunities. This could take some time to play out, but we feel very good about our ability to shift resources and pursue opportunities as they present themselves.
Speaker Change: On the Store Operations Front, we are testing a higher mix of full-time associates in select stores.
Speaker Change: Like any other retailer, associate turnover at the store level presents challenges. Full-time associates tend to have a higher vested interest, lower turnover, resulting in significantly higher productivity rates.
Speaker Change: with time and experience associates become more proficient in how we operate, including how to best merchandise the stores. This can have a meaningful impact on store execution and the early results of this test are encouraging.
Speaker Change: on the marketing front.
Speaker Change: We continue to ship the advertising dollars into various platforms.
Speaker Change: Our enhanced digital capabilities are helping us to reach new and younger customers and keeping our brand top of mind with existing customers. They are also allowing us to selectively target specific profiles such as previous customers of 99s and only stores and customers of other discount retailers.
Speaker Change: Our expanding customer base is reflected in our Ollie's Army results.
Speaker Change: Consistent with prior trends, we are seeing growth in our younger customer demographic and retention of higher income customers.
Speaker Change: We ended the quarter with 14.5 million active all-as army members, and sales the members continue to account for over 80% of total sales.
Speaker Change: To enhance the benefits of our Always Army program, we recently announced the offering of a new co-branded Visa card at card. We designed the card program that's tailored to our value-based customers with unique features and benefits.
Speaker Change: These include higher approval rates, no annual fees, and no late fees of any kind.
Allie: All these credit card holders will automatically be enrolled in our Allie's Army Lowlti program and receive $10 back on their first purchase at Allie's, Allie's Army Points where every purchase made anywhere on the card and extra points for purchases at Allie's stores.
Speaker Change: We are rolling out the car to customers on a state-by-state basis over the next year, beginning with Pennsylvania this month.
Speaker Change: The credit card program will help grow Ali's army, build a stronger connection to our members and give us better insights into customer spending patterns.
Speaker Change: before I turn the call over to Rob.
Rob: I would like to thank the entire Allis Army team for their continued hard work and commitment. I'm honored to be part of an organization that has a clear purpose and an amazing culture.
Speaker Change: We sell good stuff cheap and save customer's money on the things they want and need for their everyday lives. This has been our business from day one and continues to motivate us each and every day.
Speaker Change: Rob. Thanks, Eric, and good morning, everyone. We are pleased with our second quarter results, which exceeded our expectations driven by strong sales growth and disciplined expense control.
Rob: Before we run through the second quarter numbers, let me touch on a few key areas.
Rob: First, seasonal sales were very strong in the quarter, particularly the Rumeur category.
Rob: We had a great in stock inventory position in air conditioners and fans, and the warm weather throughout the quarter drove better than expected sales
Rob: The higher mix of AC sales generated strong increases in both average ticket and gross profit dollars, but put a little more pressure on our gross margin rate than originally class.
Rob: Second, our sales momentum builds as a quarter progressed, with our two-year stack homes peaking in the month of July.
Rob: We're pleased with the momentum ending the quarter into August, but we're also aware of the competitor liquidations taking place around us in the next month or soon that could impact our stores in the surrounding areas. With that said, let me run through some of the second quarter numbers.
Rob: Net sales increased 12% to 570 million dollars driven by new store growth and a 5.8% increase in our comparable store sales.
Rob: Our concrete crease was primarily led by strong growth in transactions, but basket and average unit retail were also nicely positive in the quarter.
Rob: Our best performing categories were room air, housewares, sporting goods, food and candy.
Speaker Change: All these Army members should have increased 8% to 14.5 million members and failed to our members represented over 80% of total sales.
Speaker Change: During the quarter we opened nine new stores, ending with 525 stores in 31 states, an increase of 9% year over year. We remain pleased with the performance of our new stores, which continue to perform in line with our expectations.
Speaker Change: Grosmargen decrees slightly to 37.9%. The 30 basis point declined from last year was primarily driven by a mixhip towards the room air and consumables categories.
Speaker Change: SGA expenses were well managed during the quarter, decreasing a hundred basis points as a percentage of net sales to 25.2% driven by leverage to fix expenses on the increase in comparable store sales and disciplined expense control.
Speaker Change: Operating incoming creates 16% to 61 million dollars, an operating margin increased 30 basis points to 10.5% in the quarter.
Speaker Change: Adjusted net income increased 16% to 48 million dollars, and adjusted earnings per share increase to 78 cents.
Speaker Change: Lastly, adjusted EBITDA, increased 16% to 474 million dollars, and adjusted EBITDA margin increased 50 basis points to 12.9% for the quarter.
Speaker Change: Turning to the balance sheet, our balance sheet remains very strong and is a significant strategic asset, which provides us maximum flexibility to drive growth and maximize your hold of returns.
Speaker Change: We ended the quarter with 353 million between cash on hand and short-term investments and no outstanding borrowings under a revolving credit facility.
Speaker Change: Inventories increase 7% to 531 million dollars primarily driven by new unit growth.
Speaker Change: Capital expenditures totaled $38 million for the quarter, and we're primarily related to the completion of our new distribution center in Prince vanilla Noi. The purchase of the 99th sense only store locations, three modeling of existing stores and the development of new stores.
Speaker Change: We bought back $6 million of our common stock in the second quarter and it ended the first half with $31 million in share repurchases right on our targeted capital allocation.
Speaker Change: Turning to our outlook, we are raising our fiscal 2024 sales and earnings guidance.
Speaker Change: This race flows through the upside in the second quarter and maintains our outlook for the second half of the fiscal year, despite some near-term potential impacts from the liquidation cells from a large discount retailer closing stores.
Speaker Change: For the full year, which is a 52-week year, compared to 53 weeks in 2023. We now expect total net sales of 2.276 to 2.291 billion.
Speaker Change: Comparable store sales growth of 2.7 to 3.2%.
Speaker Change: for a margin of approximately 40%
Speaker Change: To appreciation and amortization expensive approximately 42 million, which includes 11 million dollars that runs through cost of goods sold.
Speaker Change: Pre-opening expenses were approximately 17 million.
Speaker Change: Operating income of 252 to 259 million Net interest income of approximately $15 million And adjusted net income of $199 to 203 million and adjusted net income per Looted share of $3.22 to $3.30.
Speaker Change: Capital expenditures are expected to be approximately 104 million, which includes the 14 million purchase price for the 99th and only stores.
Speaker Change: Lastly, let me provide color on how we're thinking about the quarterly comp and store opening cadence.
Speaker Change: For the third quarter, we are still projecting comparable store sales to be flat. While we have good momentum in the business, the flat compass option now includes some disruption from the store closing liquidation sales later this quarter.
Speaker Change: As a reminder, the third quarter will also have one less flyer that moves out of the quarter and into the fourth quarter.
Speaker Change: For the fourth quarter we would expect comparable store sales to be slightly above the high end of our long-term algo of 1 to 2% due to the shift of the flyer.
Speaker Change: For new store openings, we are still targeting a total of 15 new stores, less 2 closures that we chose not to renew the leases.
Speaker Change: We expect to open 25 stores in the third quarter and 12 in the fourth quarter.
Speaker Change: You prioritize the opening of the 99st and only stores, having already opened the handful, with the balance expected to open in the next few weeks.
Speaker Change: With other real estate opportunities on the horizon, we are ready to shift resources towards accelerating unigrop and will evaluate opportunities as they become available.
Speaker Change: Now let me turn the call back over to John.
John Swygert: Thanks, Rob.
John Swygert: I would like to thank the entire Alley's team for everything they do to make us great.
John Swygert: is the combined experience, passion, and commitment from everyone that makes us successful. Our teams are doing an incredible job buying deals, taking care of our customers, and keeping our stores stock with amazing deals.
John Swygert: We have so much growth ahead of us, and in many ways we are just getting started as we say, we are. Aloo!
Speaker Change: That concludes our prepare remarks and we are now happy to take your questions, operator.
Matthew Boss: Thirdly, and our first question for today comes from a lot of so Matthew bombs from JP Morgan. Your question, please. Great. Thank you. Congrats on a really nice quarter.
Matt: Thanks, Matt. John, maybe two-part question. So impressive, two-q-com, five to six percent.
Matthew Boms: Despite Lapping the toughest compare of the year. I guess maybe could you elaborate on the cadence of trends through the quarter? Maybe what you've seen so far in August seems like you're embedding some level of consolidation impact as the quarter progresses. And then second part to that question is just...
Speaker Change: What do you see as a multi-year opportunity, potentially from industry consolidation? I think both from a market share perspective, but then also what is size and scale doing to the business as it relates to relationships and potentially longer term to margins?
Rob: Hey Matt, this is Rob. I'll take the first part of the question that I'll hand it over to John for the second part. From a complex perspective for the second quarter, we were nicely positive in over three months to the quarter. As you recall, when we discussed, we had a really strong company in the month of July last year.
John Swygert: and so it's the exit the quarter with a positive comp against that big comp that we saw in July. We were very pleased with that.
John Swygert: In terms of August, we've continued that momentum from July into August. We have had our flyer shifts that have impacted us in the muscle August, but we're pleased with where we're sitting, we're running slightly ahead of plan.
John Swygert: You know, our guidance to the flat reflects the potential for the impact of the liquidations, happening at the tail end of the quarter, but is all set by the momentum that we're seeing right now in our business.
John Swygert: Matt, it's Eric. I'll take the second part of your question.
Speaker Change: With the investments we've made in our infrastructure over the past several years, including the expansion of a Pennsylvania distribution center and the Illinois DC that we just successfully started up.
Speaker Change: Revising our long-term growth target from what was 50 to 55 stores to set the floor at 10% unit growth.
Speaker Change: With the ability to accelerate that growth, we're excited about the real estate opportunities that are out there and on an opportunistic basic basis when the unit economics makes sense, we will accelerate, we're not going to risk.
Speaker Change: The Continuing Excutter Business and Deliver Profile Growth for this acceleration, but we are preparing for it. In terms of the market and the market share opportunity.
Speaker Change: We have a fairly meaningful share of wallet with some of the customers out there that or some of the retailers out there that are distressed. So we are excited about the opportunities in terms of market share, we're excited not only for real estate and
Speaker Change: in people, but we're all excited for product and close-outs that come out of those situations. We've experienced in the past with other retailers that have...
Speaker Change: have gone out, like, the bathroom beyond, and Tuesday morning, for example.
Speaker Change: So, we're positioned well.
Speaker Change: And now let me just add to that one little thing here with regards to our size and scale in our ability to continue to.
Speaker Change: Foster and drive strong relationships with key vendors. I think that's a key takeaway as well. And we are the largest buyer of close-outs in the market today.
Speaker Change: and we continue to focus on that and I think we continue to have a stronger vote in our model that we continue to be able to be the first call and we're seeing a lot of activity from many different vendors out there in the marketplace where it can continue to do what we've done for many many years.
Speaker Change: We continue to have great relationships and very strong balance sheet in the vendor community appreciate that and we appreciate them.
Speaker Change: It's great how I said what
Matt: Thanks, Matt.
Speaker Change: Thank you and our next question comes from line of Edward Kelly from Wells Fargo. Your question, please.
Edward Kelly: Hi guys, good morning and yeah, great right, nice quarter. I wanted to ask you about the gross margin. You know, so we think about this quarter.
Edward Kelly: I don't know, can you quantify how much in the mix that ended up hurting you and then you know going forward presumably I mean, obviously the you know the AC stuff's not going to continue but maybe the consumables do you reiterate the full year gross margin target even though Q2 was a little light so just curious is to what the offset to that would be and then how we should be thinking about this you know Q3 and Q4 cadence around that.
Speaker Change: And let me take the last part and then I'll let Rob take the details with regards to good too. With regards to a few full year guide at the 40% we had some pressure in Q2 from the overall mix shift.
Rob: Not as significant as you might think in what your expectations would have been. So we believe that we're still well positioned to deliver the full year of 40% gross margin, because the business does change significantly in Q3 and Q4. So we feel like we're in pretty good shape to continue to feel confident about the 40% gross margin in the full year basis. And I'll let Rob kind of take you through Q2.
Rob: From the make shift perspective, we were coming into the quarter before we saw the higher penetration in the AC cells and the consumer's area.
Rob: We were planning for a modest expansion year over year, so call it, you know, a 38, 4, 38, 5 in terms of gross margin. Essentially all of the differential from our original plan to our actual results, the liver, is that makeshift.
Rob: Okay.
Speaker Change: and then as it pertains to competitor liquidations, you know, that you see on the horizon. I guess, how are you thinking about the impact, how difficult is that to estimate and how long, you know, does that last and just kind of curious and, you know, your confidence around that I can't with that sort of in the background.
Speaker Change: The impact of liquidation is somewhat unprecedented for us. We haven't seen a competitor closure like this in terms of share of wallet, at least in recent history.
Speaker Change: Typically, these compress liquidations, they're selling a large amount of goods into a short compress window at a high markdown rate.
Speaker Change: Initially the customers of the brand or the shop, you know, shop these liquidations, but once you get towards the end you kind of get away from your core customer
Unknown Executive: and Natural Results for the second quarter of fiscal year 2024. Currently all participants are in listen only mode. Later we will conduct a question and answer session and interactive instructions will follow at that time.
Speaker Change: So it's really hard to quantify, you know, how much of an impact this could have. We know that we've been gaining share, you know, over the last, you know, say two years, particularly. So we like our ability to meet compete, but we thought it prudent to call it out for the street and our guidance and be conservative and try to beat the expectations.
Unknown Executive: Please be advised that this call is being recorded and reproduction of this call in whole or in part is not permitted without express written authorization of Ollie's.
Unknown Executive: Joining us on today's call from Ollie's management are John Swagert, Chief Executive Officer, Andrew, Eric Vander, Valk, President and Robert Helm, Executive Vice President and Chief Financial Officer. Certain comments made today may constitute for looking statements and are made pursuant to and within the meaning of the safe harbor provisions of the private securities litigation reform act of 1995 as amended. Such for looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements.
Speaker Change: and then we're very well positioned. So there's a, you know, I call it a potential, but it's a very hard to quantify almost impossible to quantify, but it's a short term pain for a long term gain that we're in experience here.
Speaker Change: Yeah, understood. Thanks guys. Thank you.
Unknown Executive: Those risks and uncertainties are described in our annual report on form 10K and quarterly reports on form 10Q on file with the SEC and the earnings press release. For looking statements made today are as of the date of this call and we do not undertake any obligation to update these statements.
Speaker Change: Thank you!
Speaker Change: and our next question comes to the line of Peter Keith from Piper Sandler, your question, please.
Peter Keith: Hi, thanks for coming on you guys, the very results in the stores look great. On the competitor closures I'll just say it looks like big lots is closing a bunch of stores so maybe I'll see what we're talking about.
Peter Keith: You historically haven't called out a headwind from competitor closures so I guess the straightforward question is, is the big lab store closures? Are those a larger opportunity than previous store liquidations from other competitors?
Peter Keith: Peter, I think simply put the answers yes.
Speaker Change: and we've not typically called it out because it hasn't been.
Unknown Executive: Today's call the company will also be referring to certain non-gap financial measures. Reconciliation of those most closely comparable gap financial measures to non-gap financial measures are included in our earnings press release.
Peter Keith: as directly located in our marketplaces that we believe could be impactful, but we don't know the answer. So we're just taking a cautious approach at it. We're not worried.
John Swagert: With that said, I'll now turn the call over to Mr. Swagert. Please go ahead, sir. Thank you and good morning, everyone. We appreciate you joining our call today. We are extremely pleased with our strong performance this quarter with better than expected sales and earnings. Our customers continue to respond to our amazing deals and we are executing our model at a high level. Our comparable store sales increase of 5.8% was well above our expectations and was driven by increases in both transactions and basket.
Peter Keith: But we thought we'd be prudent to call it out. We do think there's obviously some impacts. We don't know what they are at this point. But we think we're like a said...
Peter Keith: Earlier, we're well positioned, we felt comfortable, we're sitting right now and we'll be able to navigate through it.
Speaker Change: OK, very good. And then you did provide the gross margin mix impact from the air conditioners. You could also provide us with maybe the conflict that you got from that category in Q2.
Speaker Change: As a conflict was about two full points of comp on the 5.8% comp that we split this quarter.
John Swagert: Our room error and housework departments were the two big standouts in the quarter but we also continue to see strength in sporting goods, food and candy. Food, candy and sporting goods have been leading categories for some time and these are all good examples of how strengthening our vendor relationships with major manufacturers continues to drive consistent product flow of compelling deals. Consumers are seeking value and this is driving growth in the discounted and off price channels.
Speaker Change: Very good, thanks so much guys.
Speaker Change: Thanks Peter.
Speaker Change: Thank you and our next question comes from the line of Kate Chene from Goldman Sachs, your question, please.
Kate Chene: Hi, thanks!
Kate Chene: for taking our question. Just to ask another question about the liquidation center taking place. Can you quantify how much of your store base is being impacted by this or how much overlap there is? And is there any kind of risk that the liquidation can pull forward demand where it could impact the quarters beyond Q3?
John Swagert: The bigger retailers are gaining share and the larger manufacturers who supply them are competing for shelf space. Retellers are continuously updating their product offerings and manufacturers are supporting this by introducing new products and packaging. As a result, there is a constant availability of products and inventory across the supply chains and this provides additional opportunities in the closeout market. Consolidation on both sides of the aisle has led to more product flow, higher levels of excess inventory and a larger closeout industry.
Kate Chene: Hey, this is Rob. I'll answer that question. There are 296 stores closing. We account for roughly 100 of those stores as located in our trade areas. So that's the quantification there.
Kate Chene: from a pull forward of demand, you know, John reference, it is unprecedented, you know, we haven't seen this something this big, you know, in recent years.
John Swagert: Some very large retailers have gone out of business in the past several years and the stakes for those remaining are getting higher. While the closeout industry continues to grow in size, the number of large scale buyers of this for this product continues to shrink. Our size, scale, and over 42 years of industry experience is a real strategic advantage and this is fueling our growth. Anyone can sell cheap products these days, but our true value proposition is selling good stuff cheap.
Speaker Change: But our intel suggests that there's not a seasonal assortment, not a high degree of choice getting these doors and that the go-forward season, they didn't buy in place in these liquidating stores. So we're hopeful that it won't impact the core of the Q4.
Speaker Change: Okay, thank you and if I could just follow up, I know you talked about the performance of categories that drove the comp in the quarter, but we wondered about the performance and maybe some of your other bigger categories and what that's telling you about the consumer health and market share gains.
John Swagert: We sell nationally branded products that people need and want at prices typically 20 to 70% below the fancy stores. Real brands, real bargains, has always resonated with customers and we don't think this will ever go out of style. We completed the quarter with 525 stores across 31 states. Our longer term target is more than 1,300 stores across the United States. To support our continued growth, we have invested in people, processes, marketing, supply chain, and information technology, all of which have led to better and more consistent execution.
Speaker Change: Okay, we pretty much, you know, about 50% of our categories come to positive for the quarter and as we've, you know, we've said in the past a lot of our fluctuations, departmentally, are deal driven and annualizing and deal from the prior year or so for instance.
Florian: Florian was one of our weakest performing categories in the quarter, but we're...
Florian: Analyzing a strong deal from last year, so it's not necessarily the reflection of the customer, the deal motivates the consumer. We're not seeing any real slowdown from the deals we're offering category that the customers are responding to, so we feel really good We've all seen from our customer shopping patterns and our stores. I think Kate also just on the health of the consumer. We're actually seeing strength across all income segments this quarter.
John Swagert: The proof is in the strength and consistency of our results. Nine consecutive quarters of comparable store sales growth, a return to a 40% annual gross margin, and adjusted EBDA margin in the low teens, and the ability to opportunistically accelerate new store openings without sacrificing execution of the business. The 99 cent only store transaction was one of those opportunities and there are potentially others on the horizon. Our team is ready for such opportunities.
Kate Chene: Our strongest growth is coming from the lower middle income segment which is the 40 to 60,000 household income segment and we're continuing to see retention of higher income customers at that 100k plus level. So we're very happy that we're seeing a terms of the overall strength.
John Swagert: The operational improvements that Eric and the team have made up and down the business have been able to be more nimble organization and I have never been more confident in our ability to drive profitable growth. We are well positioned to continue executing at a high level and winning into the future.
Kate Chene: of our customer.
Speaker Change: Thank you.
Speaker Change: Thank you, and our next question comes from the line that's got chicken rally from through this to your question, please.
John Swagert: We announced a number of executive promotions and appointments on our last earnings call that position us for continued long term success.
Josh Young: Good morning guys, this is Josh Young on First Cut. So you talked about SGNA being well controlled, but based on the new guidance, it looks like flow through is a little limited on the higher sales. So if you just give us some color on how you're thinking about that.
John Swagert: With the team in place and the transition progressing, the plan is to pass the CEO responsibilities to Eric in early 2025.
Speaker Change: We were really pleased with the flow through for this quarter. We leverage 100 basis points.
John Swagert: Eric will play a more visible role on these calls and investor events going forward.
Eric Valk: With that said is my pleasure to turn the call over to Eric. Thanks John and good morning everyone. Our strong second quarter performance is the result of our great deal flow and the strong execution of our team. The process improvements and investments we have made in our people supply chain stores and marketing continue to pay off in the form of better productivity and consistent financial results. As John alluded to, this has also made us a more nimble organization capable of working through exogenous challenges and opportunities.
Speaker Change: Our five-point aid comp would attribute roughly 40 basis points of leverage so we gain 60 basis points of other leverage within our expenses. We were able to see some efficiency and advertising as we continue to shift from digital to print.
Speaker Change: The Apprentice Digital, as well as some favorability and store payroll for some of our early optimization efforts, those initiatives.
Speaker Change: Okay, that's all. And then you know, you mentioned the strength across kind of the different cohorts and data and some share with higher income consumers. Just curious within that group how sticky you think those customers are in the longer term here.
Eric Valk: The collapsing of the Baltimore bridge was a tragic event that could have been catastrophic to our business given this is one of our most important ports of entry. However, we were able to quickly reroute ocean containers with minimal impact to the business. The same goes for the recent rise in ocean shipping rates. We negotiated our annual contracts in early May, slightly below budget. Despite the short term spike in rates, we have been able to effectively move products while delivering against our gross margin targets.
Speaker Change: We're seeing a couple quarters of trend that they looked to be sticky, but it's only a couple quarters, so we'd seen a pretty sizable tray down.
Speaker Change: of Coordars and Alarm Singh, good retention. We measure retention over a two-year period, so we haven't laughed the trade-down impact yet, but we like the trend we're seeing a lot.
Eric Valk: The startup of our fourth distribution center is another significant event that we have methodically planned and executed over the past several years. Located in Princeton, Illinois, this facility was open on time and on budget. We began shipping products to stores in late July and we are very pleased with its performance. This facility was a big undertaking in every associate who worked on this project deserves a huge congratulations and thank you. The new facility has a number of technology and productivity enhancements that will help us scale and increase productivity over time. This new distribution center sets us up for continued growth in the Midwest, and we now have the capacity to service up to 750 stores in total.
Speaker Change: All right, that's all for thanks guys.
Rock: Thanks, Rock.
Speaker Change: Thank you and as a reminder ladies and gentlemen, if you do have a question at this time, please press star 1 1 on your telephone. Our next question comes along of Brad Thomas from Keybank Capital Markets, your question please.
Brad Thomas: and I wanted to start with a real estate opportunity ahead.
Brad Thomas: You know, when we think about some of the big lots closures that are happening and additional one may happen on the horizon, I was hoping you could talk a little bit about your bandwidth to perhaps take on opportunistic real estate opportunities.
Eric Valk: On our last earnings call, we talked about the acquisition of a number of 99 cent-only stores and our ability to take advantage of this opportunity by prioritizing the opening of these stores and accelerating our store growth over the next 18 months. The majority of the 99 cent-only stores will open in September and are teamed at a fantastic job of reprioritizing around these grand openings. Texas is a great market for us, and one where we still have tremendous growth opportunity. These stores are the right size located in good trade areas, have attractive occupancy costs, and have an established base of value-oriented customers. They will only strengthen our presence in key markets across the state.
Speaker Change: and how many stores are these too many at what level do you worry about?
Speaker Change: Your ability to source these new stores, how much could you take them on and perhaps tuck them away for the next couple of years, just how are you thinking about things if we do find ourselves with many more store locations that might be opportunities for you all.
Speaker Change: Yeah, Brad, I'll answer it and then I think Eric will probably add some to it.
Brad Thomas: With regards to how many I don't know at this point in time how many we think we could take and talk for a year, you know, two or three year period. I don't think that's very feasible.
Eric Valk: There's been a recent uptick in the number of store closures, and we are positioned to make the most of these opportunities. This could take some time to play out, but we feel very good about our ability to shift resources and pursue opportunities as they present themselves.
Eric Vander: I think that's riskier than it is beneficial so we would probably not be interested in trying to do something that nature just has a lot of pressure on our overall core business and our ability to run it so you know trying to carry the dead rent.
Eric Valk: On the store operations front, we are testing a higher mix of full-time associates in select stores. Like any other retailer, associate turnover at the store level presents challenges. Full-time associates tend to have a higher vested interest, lower turnover, resulting in significantly higher productivity rates. With time and experience, associates become more proficient in how we operate, including how to best merchandise the stores. This can have a meaningful impact on store execution, and the early results of this test are encouraging.
Eric Vander: of Stores for a long period of time is not beneficial to us and the way we look at it today. In terms of our ability, how many of you could open and accelerate, I'll let Eric take that piece of it? Yeah, I think just to follow up on DeadRine, we're considering every angle on that. So it really depends on how attractive the occupancy costs and what the...
Eric Vander: sort of the penalty of dead rat would be the cadence of...
Eric Vander: The store openings is critical to acceleration, so if there's enough inventory of stores out there that we can get at
Eric Valk: On the marketing front, we continue to shift advertising dollars into various platforms. Our enhanced digital capabilities are helping us to reach new and younger customers, and keeping our brand top of mind with existing customers. They are also allowing us to selectively target specific profiles, such as previous customers of 99s and only stores, and customers of other discount retailers. Our expanding customer base is reflected in our Ollie's Army results. Consistent with prior trends, we are seeing growth in our younger customer demographic and retention of higher-income customers. We ended the quarter with 14.5 million active Ollie's Army members, and sales to members continue to account for over 80% of total sales.
Speaker Change: Opening a cadence that's a little bit more even quarter to quarter gives a stability to accelerate rather substantially.
Speaker Change: We're very aggressive in the process of any surplus locations that are out there, any announced closures.
Speaker Change: We've been able to navigate now the...
Speaker Change: We're not setting necessarily a limit on how many stores we would open is part of the acceleration but we do believe it can't be meaningful and we will ensure whatever acceleration we ultimately commit to based on opportunities in front of us that we do not risk the execution of our core business.
Eric Valk: To enhance the benefits of our Ollie's Army program, we recently announced the offering of a new co-branded Visa credit card. We designed the card program that's tailored to our value-based customers with unique features and benefits. These include higher approval rates, no annual fees, and no late fees of any kind. Ollie's credit card holders will automatically be enrolled in our Ollie's Army loyalty program and receive $10 back on their first purchase at Ollie's.
Speaker Change: That's really helpful, and you talked about the trends and the consumer's performance.
Speaker Change: But as we look to the all important holiday season, can you talk a little bit about perhaps any merchandising opportunities that you have and any nuances that you're seeing and how the customer shopping your source today is it relates to how fortune they play out.
Eric Valk: Ollie's Army points for every purchase made anywhere on the card, and extra points for purchases at Ollie's stores. We are rolling out the card to customers on a state by state basis over the next year, beginning with Pennsylvania this month. The credit card program will help grow Ollie's Army, build a stronger connection to our members, and give us better insights into customer spending patterns.
Speaker Change: I think Brad, that's probably very speculative for us to comment on. I would tell you we believe we're very well positioned.
Brad Thomas: for the holiday season. Our merchants have done a great job.
Brad Thomas: Getting the inventory that we believe is right for the customer at the right values. So I think we're set to win.
Eric Valk: Before I turn the call over to Rob, I would like to thank the entire Ollie's Army team for their continued hard work and commitment. I am honored to be part of an organization that has a clear purpose and an amazing culture. We sell good stuff cheap and save customers money on the things they want and need for their everyday lives. This has been our business from day one and continues to motivate us each and every day.
Speaker Change: But I think it's a little too early to speculate on anything else at this point in time. Yeah, I would add that we're very excited about our seasonal sortmen and our toy sortmen moving into the holiday season and we have some evidence of early selling.
Speaker Change: on the seasons that are kind of the pre-prelude to Christmas and we really like overseeing and it's getting us more excited about what's flowing into stores, we'll start setting Christmas actually next week. So excited to see what comes out of that business, season only, and toys.
Robert Helm: Rob, thanks Eric. Eric and good morning everyone. We are pleased with our second quarter results which exceeded our expectations driven by strong sales growth and disciplined expense control.
Speaker Change: for the sample thanks so much.
Robert Helm: Before we run through the second quarter numbers, let me touch on a few key areas. First, seasonal sales were very strong in the quarter, particularly the room air category. We had a great in stock inventory position in air conditioners and fans and the warm weather throughout the quarter drove better than expected sales. The higher mix of AC sales generated strong increases in both average ticket and gross profit dollars but put a little more pressure on our gross margin rate than originally planned.
Brett: Thanks, Brett.
Speaker Change: Thank you, and our next question comes in line of Eric Cohen from Gordon Haskin. Your question, please.
Eric Cohen: Hi, thanks, good morning. You talked about more retailers are closing stores and the close-out market is growing and your scales improving. Are you seeing deeper deals, bigger deals with your existing vendors? Are you adding new vendors with new categories for the store? And with big lot of store closings going on now, have you been able to capitalize on any of the vendors that were with them that you didn't have relations with previously?
Robert Helm: Second, our sales momentum built as the quarter progressed with our two year stack homes peaking in the month of July. We're pleased with the momentum ending the quarter into August but we're also aware of the competitor liquidations taking place around us in the next month or so. We're pleased with the momentum ending the quarter in the next month or so that could impact our stores in the surrounding areas.
Eric Cohen: I'm Eric, I'm only going to comment that I would tell you we are seeing a great deal flow. We're seeing some additions to our offerings from new relationships with vendors.
Robert Helm: With that said, let me run through some of the second quarter numbers. Net sales increased 12% to $578 million driven by new store growth and a 5.8% increase in our comparable store sales. Our comp increase was primarily led by strong growth in transactions but basket and average unit retail were also nicely positive in the quarter. Our best performing categories were room air, housewares, sporting goods, food and candy. Ollie's army membership increased 8% to 14.5 million members and sales to our members represented over 80% of total sales.
Speaker Change: and the deals we're seeing out there are very compelling and we're very excited what we're getting out there.
Speaker Change: Alright, and you didn't have them coming, I'm sure I think it was running like 100 basis points ahead of pre-pandemic levels, just curious where that is now, and then as that sort of normalizes, could that be gross margin, upside to the 40% over time, or would you likely reinvest that back into the business?
Rob Schrin: Hey, Eric, this is Rob Schrin, Schrin's pretty much at a plateau. We've kind of been at the level for a bit now. We're working hard as possible to mitigate it. You know, we've talked about it. It's a local hyperlocal problem. And we're putting resources into those hyperlocal markets.
Robert Helm: During the quarter we opened nine new stores ending with 525 stores in 31 states and increased of 9% year over year. We remain pleased with the performance of our new stores which continue to perform in line with our expectations. Gross margin decreased slightly to 37.9%. The 30 basis point declined from last year was primarily driven by a mix shift towards the room air and consumables categories. SGNA expenses were well managed during the quarter decreasing 100 basis points as a percentage of net sales to 25.2% driven by leverage the fixed expenses on the increase in comparable store sales and discipline expense control.
Rob Schrin: to mitigate it, but so far we've been pretty flat to where we've been over the last couple of quarters.
Speaker Change: From a tailwind perspective, our model has always been to deliver a 40% gross margin and then to reinvest in price above that. At this moment, as competitors are struggling and consumers are pinched, we would continue to do that in the near term.
Speaker Change: Thanks for watching!
Speaker Change: Thank you, and our next question comes in the line of Jeremy Hambleen from Crick Howlem. Your question, please.
Robert Helm: Operating income increased 16% to $61 million and operating margin increased 30 basis points to 10.5% in the quarter. A trusted net income increased 16% to $48 million and adjusted earnings per share increased to 78 cents. Lastly, adjusted EBITDA increased 16% to $474 million and adjusted EBITDA margin increased 50 basis points to 12.9% for the quarter.
Jeremy Hambleen: Thanks and I'll add my congratulations on the strong results. I want to come back to the real estate question and think about in terms of if you accelerated real estate plans because there's 300.
Speaker Change: Roughly 300 locations closing. You noted that only about a third of them are in your current trade areas. You have just opened up a new DC in Illinois.
Speaker Change: In terms of thinking about where you might go after locations and you've had some success or hopefully have some success with a 99 cent only
Robert Helm: Turning to the balance sheet, our balance sheet remains very strong and is a significant strategic asset which provides us maximum flexibility to drive growth and maximize shareholder returns. We ended the quarter with 353 million between cash on hand and short term investments and no outstanding borrowings under a revolving credit facility. Our expenditures totaled $38 million for the quarter and were primarily related to the completion of our new distribution center in Princeton, Illinois, the purchase of the 99 cents only store locations, the remodeling of existing stores and the development of new stores. We bought back $6 million of our common stock in the second quarter and it ended the first half with 31 million in share repurchases right on our targeted capital allocation.
Speaker Change: Would you potentially add into new trade areas in these real estate opportunities that are coming or would you exclusively focus on areas that you already currently have markets in?
Jeremy Terrick: Jeremy Terrick.
Speaker Change: Yes, kind of sort of like we're committed to contiguous growth.
Jeremy Terrick: So, contiguous states will consider to our current trade areas.
Jeremy Terrick: We think, given the size of the opportunity.
Jeremy Terrick: We should have a meaningful opportunity in our current trade areas and there are plenty of locations that will make sense in existing trade areas.
Jeremy Terrick: In general, even in a state like Pennsylvania, where we're most saturated, we have opportunities to open additional stores. So our focus is on existing trade areas, but we're considering contiguous states.
Robert Helm: Turning to our outlook, we are raising our fiscal 2024 sales and earnings guidance. This raise flows through the upside in the second quarter and maintains our outlook for the second half of the fiscal year despite some near term potential impact from the liquidation sales from a large discount retailer closing stores. For the full year, which is a 52-week year compared to 53 weeks in 2023, we now expect total net sales of 2.276 to 2.291 billion.
Speaker Change: Got it, and just a quick follow up to that. I know it's a bit forward-looking, but in terms of thinking about, you know, capex budgets in the potential range of outcomes.
Robert Helm: Comparable store sales growth of 2.7 to 3.2 percent, gross margin of approximately 40 percent, depreciation and amortization expense of approximately 42 million, which includes $11 million that runs through cost of goods sold. Pre-opening expenses are approximately 17 million, offering income of $252 to $259 million, net interest income of approximately $15 million, and adjusted net income of $199 to $203 million, and adjusted net income per deluded share of $3.22 to $3.30. Capital expenditures are expected to be approximately $104 million, which includes the $14 million purchase price for the 99 cent only stores.
Speaker Change: You know, given the potential for real estate acquisition.
Speaker Change: It's really hard to tell in this moment.
Speaker Change: We don't have a lot of information besides the 296 closures that have been reported, you know, there's the potential for other
Speaker Change: Other things have happened.
Speaker Change: So we've got to really see.
Speaker Change: You know what happens there and then respond to it? You know, it's a broadly, you know, our CAPIX assumption for next year. You know, based on what we see today is probably, what a half percent of our net sales, somewhere in that range. But we certainly have the financial strength to be able to flex that up if we've required.
Speaker Change: and Jeremy just to add, I don't think it's prudent to speculate on what could be that's not how we operate the business and how we plan. So it's great to talk about, but it's not something we're going to commit to or speculate at this point in time either.
Robert Helm: Lastly, let me provide a color on how we are thinking about the quarterly comp and store opening cadence. For the third quarter, we are still projecting comparable store sales to be flat. While we have good momentum in the business, the flat comp assumption now includes some disruption from the store closing liquidation sales later this quarter. As a reminder, the third quarter will also have one less flyer that moves out of the quarter and into the fourth quarter.
Speaker Change: Great, appreciate the color best wishes.
Speaker Change: Thank you.
Speaker Change: Thank you, and I have some reminder ladies and gentlemen, if you do have a question at this time, please press star one one on your telephone. Our next question comes from the line of Melanie Nunes from Bank of America. Your question, please.
Robert Helm: For the fourth quarter, we would expect comparable store sales to be slightly above the high end of our long-term algo of 1 to 2 percent due to the shift of the flyer. For new store openings, we are still targeting a total of 15 new stores, less two closures that we chose not to renew the leases. We expect to open 25 stores in the third quarter and 12 in the fourth quarter. We prioritize the opening of the 99 cent only stores having already opened the handful with the balance expected to open in the next few weeks. With other real estate opportunities on the horizon, we are ready to shift resources towards accelerating unit growth and will evaluate opportunities as they become available.
Melanie Nunes: Hi, good morning, things are taking my question. I just wanted to ask quickly on the 99th sense only stores. I mean, I mentioned you've opened a handful of them. Just curious how though it's been performing if they're in line with expectations and if there's any update to the
Melanie Zerk: I'm Melanie Zerk, we...
Speaker Change: We've only had about a week behind our belt on a couple of stores being a day on some others. We've opened half of the night at 10 or stores to date.
Speaker Change: and we took a little bit of a different approach with this since it was an acquisition and we were on the hook for the ownership or the rent immediately. We actually soft opened these doors and haven't run our grand opening event which will run.
John Swagert: Now, let me turn the call back over to John. Thanks, Rob.
John Swagert: I would like to thank the entire Ollie's team for everything they do to make us great. It's the combined experience, passion and commitment from everyone that makes us successful. Our teams are doing an incredible job buying deals, taking care of our customers and keeping our stores stock with amazing deals. We have so much growth ahead of us and in many ways we are just getting started, as we say, we are Ollie's.
Speaker Change: in late September, awarding a pretty big event across the entire Houston market to celebrate opening these doors, including some of our existing stores in that market. So the answer is it's too early to tell, but we're pretty excited about the results. It seems we're getting a...
Speaker Change: a very meaningful positive response from customers. We're also excited and I mentioned it to my opening remarks.
Speaker Change: about our ability to market to the previous customers of Naniad sent only stores and get that message out to the two of our various digital channels.
Unknown Executive: That concludes our prepare remarks and we are now happy to take your questions, operator.
Matthew Boss: Certainly, and our first question for today comes from a lot of Matthew Boss from JP Morgan. Your question, please. Great, thanks.
Speaker Change: with our enhanced capabilities in that space and let them know that we're here now in that former United States and so far we like the results we're seeing there as well.
John Swagert: I think Congrats on a really nice quarter. Thanks, Matt. So, John, maybe two-part question. So, impressive, two-cute comp, five to six percent, despite lapping the toughest compare of the year. I guess maybe could you elaborate on the seasons of trends through the quarter, maybe what you've seen so far in August seems like you're embedding some level of consolidation impact as the quarter progresses. And then second part to that question is just, what do you see as the multi-year opportunity potentially from industry consolidation? I think both from a market share perspective. But then also what is size and scale doing to the business as it relates to relationships and potentially longer term to margins?
Speaker Change: Great, thank you. And then if I can just follow up on any trends you saw by geographic region during the quarter. Thanks.
Speaker Change: In terms of region, we were pretty strong across the board. I would say that if anywhere to call out significant strength, we probably saw the most strength in our southern states and in Texas in those areas.
Speaker Change #100: Thank you.
Speaker Change #101: Thank you.
Speaker Change #102: Thank you and our next question comes from the line of Timmy and Guttman from Morgan Stanley, your question please.
Rob Helm: Hey, Matt, this is Rob.
Rob Helm: I'll take the first part of the question, then I'll hand it over to John for the second part. From a con perspective for the second quarter, we were nicely positive in all three months of the quarter. As you recall, when we discussed, we had a really strong comp in the month of July last year. And so to exit the quarter with a positive comp against that big comp that we saw in July, we were very pleased with that.
Speaker Change #103: Good morning everyone. I wanted to ask on product mix and grow some margin to the back cap.
Speaker Change #104: Seasonal and Toy, I'm sure that's always a decent part of the mix as you get into the third and the fourth quarter. What is the implication on gross margin and is there any expectation that it's a good guy or bad guy based on the volume that you expect with the needs category? And if I heard correctly.
Rob Helm: In terms of August, we've continued that momentum from July into August. We have had our flyerships that have impacted us in the month of August. But we're pleased with where we're sitting. We're running slightly ahead of plan. Our guidance of the flat reflects the potential for the impact of the liquidations happening in the sale into this quarter, but is offset by the momentum that we're seeing right now in our business.
Speaker Change #105: that I thought maybe I heard some Jen Merch categories hurt the product, mixed this quarter, can you just clarify that and why would that be the case?
Speaker Change #106: The margin impact for Q2 was impacted from the room air, which is paramilitary air conditioners, which has a lower margin profile than a lot of other categories, and we call that consumables, which would have been specifically really more on the cleaning front, so that's normally carries a lower margin profile as well, so those would have been a slight drag.
Eric Valk: Matt, it's Eric. I'll take the second part of your question. With the investments we've made in our infrastructure over the past several years, including the expansion of our Pennsylvania Distribution Center and the Illinois BC that we just successfully started up.
Speaker Change #106: Tool, we normally would have reported to you in Q2, definitely seasonal in toys, would have a higher margin profile than those two categories, so there's not a drag expected from our seasonal categories whatsoever in Q3 and 4. But we'll continue to drive the business, we don't expect the same pressure we saw.
Eric Valk: We're revising our long term growth target from what was 50 to 55 stores to set the floor at 10% unit growth. With the ability to accelerate that growth, we're excited about the real estate opportunities that are out there and on an opportunistic basic basis when the unit economics makes sense. We will accelerate. We're not going to risk the continued executor business and deliver profitable growth for this acceleration, but we are preparing for it in terms of the market and the market share opportunity.
Speaker Change #107: in Q2 to replicating Q3 and 4 from the category's perspective so. Okay, that's helpful, can I ask?
Speaker Change #108: Are you seeing signs of the consumer's strain at all? I know you mentioned you're seeing strength from every income cohort, but are there any signs based on the categories in which you're selling? The consumers are hurting more, and then you're just taking shares as a store and as a channel.
Speaker Change #108: Well, I, okay, go ahead, go ahead, go ahead, Eric.
Eric Valk: We have a fairly meaningful share wallet with some of the customers out there that or some of the retailers out there that are distressed. So we are excited about the opportunities in terms of market share. We're excited not only for real estate and In people, we're all excited for product and close-ups that come out of those situations as we've experienced in the past with other retailers that have gone out like Bed Bath and Beyond at Tuesday morning, for example.
Speaker Change #108: to me, it's Eric, that the only sign of weaknesses in big ticket categories, which is continued now for, I don't know, a couple of years. So for in category, mattresses, furniture, there's weaknesses on those categories, and I think, you know, it continues to be weak across the entire industry.
Speaker Change #109: We offer extremely strong value across all categories and the strength of the value resonates across all income groups.
Eric Valk: So we're positioned well. And now let me just add to that one little thing here, with regards to our size and scale in our ability to continue to foster and drive strong relationships with key vendors. I think that's a key takeaway as well. And we are the largest buyer of close-ups in the market today. And we continue to focus on that. And I think we continue to have a stronger moat in our model that we continue to be able to be the first call.
Speaker Change #110: Okay, thank you.
Eric Valk: And we're seeing a lot of activity from many different vendors out there in the marketplace where it can continue to do what we've done for many, many years. We continue to have great relationships and a very strong balance sheet. And the vendor community appreciates that. And we appreciate that.
Speaker Change #110: That's the add one thing to it, so I think that's why we're winning. We're definitely, I think, there's the consumer stress, but that's why all these is here to serve and we're serving them very well.
Speaker Change #111: Appreciate it, thanks for good luck.
Speaker Change #112: Thank you, and our next question, comes from the line of the panelists from City, your question, please.
Speaker Change #112: Hey everyone, this is Brandon Sheetam on football. I was hoping we could dig in on the holidays, liquidation of that, and to you that I think you normally run.
Speaker Change #113: You know, how did that compare to what you were expecting? Did you see the consumer gravitate more towards those deals? Did that have any impact on those margin and the quarter will put to your expectations?
Unknown Executive: It's great, Helen. Thank you.
Edward Kelly: And our next question comes from Linde, Edward Kelly from Wells Fargo. Your question, please. Hi, guys. Good morning. And yeah, Rita, nice quarter. I wanted to ask you about the gross margin. You know, so we think about this quarter. I don't know. Can you maybe quantify, you know, how much, you know, the mix ended up hurting you. And then, you know, going forward, presumably, I mean, obviously the, you know, the AC stuff's not going to continue.
Speaker Change #114: I'll answer the first part, but then I need you to repeat the second part. From an alleys event perspective, we were pleased with the alleys. Just like we were pleased with the comp in the quarter and our results. Strong events again this year and no concerns there. No one expected the impact on March and I think it's what you're getting at.
Edward Kelly: But maybe the consumables do you reiterate the full year gross margin target, even though Q2 was a little light. So just curious as to what the offset to that would be. And then how we should be thinking about this, you know, Q3 and Q4 cadence around that.
Speaker Change #114: Good, and we'll see you next time.
Speaker Change #115: Yeah, it was around gross margin. If there was any impact on gross margin from that effect, it's actually being stronger than anticipated.
Speaker Change #116: and Unknown.
Speaker Change #117: Okay, that was something that you could expand on the Earth.
Speaker Change #118: Co-branded credit card, you mentioned you're launching anything you share on the terms there and margin impact, did you start to roll that out or marketing expense consideration?
Rob Helm: And let me take the last part. And then I'll let Rob take the details that with regards to two, with regards to the few full year guided, the 40% we had some pressure in Q2 from the overall mix shift. Not as significant as you might think in what you're versus what your expectations would have been. So we believe that we're still well positioned to deliver the full year 40% gross margin because the business does change significantly in Q3 than Q4. So we feel like we're in pretty good shape to continue to feel confidence about the 40% gross margin on a full year basis.
Speaker Change #118: This is Rob. We're excited about the card. You know, our expectation is that the card holder should...
Speaker Change #119: We should see a modest uplift in their baskets and their spend, similar to how we see an uplift for our always army customers.
Speaker Change #120: We'd expect that to be nicely accreted to our comps. We are rolling it out over the course of the next few months, so we're expecting very limited impact of fiscal 2020-2024. And should have some data to have better guide how we're thinking about it for 25.
Speaker Change #120: From a margin in location perspective, we'd expect for it to be slightly accretive to our margin rate. If the core features are wealthy and membership bonuses with the core company.
Rob Helm: And I'll let Rob kind of take you through Q2. From a mix shift perspective, we were coming into the quarter before we saw the higher penetration the AC sales and the consumables area. We were planning for a modest expansion year over year. So call it, you know, a 38, 4, 38, 5 in terms of gross margin. Essentially all of the differential from our original plans to our actual results delivered is that mix shift. Okay.
Speaker Change #121: which is who we drive that, a quit-of-ness. For most excited about it and I mentioned it, my opening remarks is the value proposition to the Always Army customer. It's enhanced value of the program itself.
Rob Helm: And then as it pertains to, you know, competitor liquidation, you know, that you see on the horizon. I guess how are you thinking about the impact? How difficult is that to estimate and how long, you know, does that last and just kind of curious. And you know, you're confident around the back half confidence with, you know, with that, in the background. The impact of liquidation is somewhat unprecedented for us. You know, we haven't seen a competitor closure like this in terms of share wallet, at least in recent history.
Speaker Change #121: [inaudible]
Speaker Change #122: and I'd like to just ask one more, you mentioned that you are looking at full-time employees, or short-time employees. Is there a potential for that to be an eventual head wing or that be a tail wing if you are converting one to full-time, getting more productivity out of your associates?
Speaker Change #122: Yeah, we Brandon is Eric. We look at it more as a tailwind, but it's really about better executing the store.
Speaker Change #123: which is going to drive top line over time. It's not necessarily an SGNA related initiative, although it could be slightly creative or perhaps it offsets any wage pressure that we may see in the future.
Rob Helm: Typically, these compressed liquidations, they're selling a large amount of goods into a short compressed window at high markdown rates. Initially, the customers of the brand or the shop shop these liquidations. But once you get towards the end, you kind of get away from your core customer. So it's really hard to quantify how much of an impact this could have. We know that we've been gaining share over the last, say, two years, particularly.
Speaker Change #123: But we look at it as more execution focused.
Speaker Change #123: because that full-time associate is more committed to us, more career oriented, looking to advance in our company. Turn over is significantly lower for full-time associate versus a part-time associate. It results in better execution.
Speaker Change #124: Thanks for watching, take care, thanks for my good luck.
Rob Helm: So we like our ability to meet compete, but we thought it prudent to call it out for the street in our guidance and be conservative and try to beat the expectations. And then we're very well positioned. So there's a, you know, I call it a potential, but it's very hard to quantify, almost impossible to quantify, but it's a short term pain for a long term gain that we're going to experience here. Yeah, I understand. Thanks, guys.
Speaker Change #125: Thanks for having me.
Speaker Change #126: Thank you, and this does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. John Swygert for any further remarks.
Unknown Executive: Thank you.
Speaker Change #127: I would like to thank everyone for their time and interest in all these. We look forward to updating you on our continued progress on our next learning skull. Thank you, never break day.
Speaker Change #128: Thank you ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect. Good day.
Peter Keith: And our next question comes from the line Peter Keith from Piper Sandler. Your question, please. Hey, thanks. Good morning, guys. There was also the stores look great. On the competitor closures, I'll just say it looks like big lots is closing a bunch of stores. So maybe that's who we're talking about. You historically haven't called out a headwind from competitor closures. So I guess the straightforward question is, is the big lot store closures, are those a larger opportunity than previous store liquidations from other competitors?
Speaker Change #128: The End
Peter Keith: Peter, I think simply put the answers. Yes. And we would not typically call it out, but hasn't been as directly located in our marketplaces that we believe could be impactful, but we don't know the answer. So we're just taking a cautious approach at it. We're not we're not worried, but we thought we'd be prudent to call it out. We do think there's obviously going to be some impacts. We don't know what they are at this point, but we think we know where, like I said earlier, we're well positioned. We feel comfortable. We're sitting right now and we'll be able to navigate through it.
Rob Helm: Okay, very good. And then you did provide the gross margin, mixed impact from the air conditioners. Could you also provide us with maybe the the conflict that you got from that category in Q2? The conflict was about two full points of comp on the 5.8% comp that we put this quarter. Very good. Thanks so much, guys. Thanks, Peter. Thank you.
Rob Helm: And our next question comes from the line of chain from Goldman Sachs. Your question, please. Hi, thanks for taking our question. Just to ask another question about the liquidations that are taking place, can you quantify how much of your store base is being impacted by this or how much overlap there is? And is there any kind of risk that the liquidation? Can pull forward demand where it could impact the quarters beyond Q3?
Rob Helm: Hey, this is Rob. I'll answer that question. There are 296 stores closing. We account for roughly a hundred of those stores as located in our trade areas. So that's the quantification there. From a pull forward of demand, you know, John reference, it is unprecedented. You know, we haven't seen this something this big. You know, in recent years, but our intel suggests that, you know, that there's not a seasonal assortment, not a high degree of toys sitting in these stores and that, you know, they go forward seasons. They didn't buy in place in these liquidating stores.
Rob Helm: So we're hopeful that it won't impact the court Q4. Okay. Thank you.
Eric Valk: And if I could just follow up, I know you talked about the performance of categories that drove the comp in the quarter, but we wondered about the performance of maybe some of your other bigger categories and what that's telling you about the consumer health and market share gains. Okay. We pretty much, you know, about 50% of our categories comped positive for the quarter. And as we said in the past, a lot of our fluctuations departmentally are deal driven and annualizing a deal from the prior year or year.
Eric Valk: So for instance, flooring was one of our weakest performing categories in the quarter, but we're we're. Analyzing a strong deal from last year. So it's not necessarily the reflection of the customer. The deal motivates the consumer. We're not seeing any real slow down from the deals were offering a category that the customers are responding to. So we feel really good. Well, we're seeing from our customer shopping patterns and our stores. I think Kate also just on the health of the consumer, we're actually seeing strength across all income segments this quarter.
Eric Valk: Our strongest growth is coming from the lower middle income segment, which is the 40 to 60,000 household income segment. And we're continuing to see retention of higher income customers at that 100 K plus level. So we're very happy with overseeing in terms of the overall strength of our customer.
Unknown Executive: Thank you.
Scott Chickarelli: And our next question comes from the line of Scott Chickarelli from truest. Your question, please. Good morning, guys.
Josh Young: This is Josh Young, I'm first Scott. So you talked about SGNA being well controlled, but based on the new guidance, it looks like flow through is is a little limited on the higher sales. So do you just give us some color on how you're thinking about that? We were really pleased with the flow through for this quarter. We leverage 100 basis points. Our 5.8 comp would attribute roughly 40 basis points of leverage.
Josh Young: So we we gain 60 basis points of other leverage within our expenses. We were able to see some efficiency on advertising is, you know, we continue to shift from digital to print. Yeah, printed digital as well as some favorability and store payroll for some of our early optimization efforts. Those initiatives.
Josh Young: Okay, that's not cool. And then you mentioned strength across kind of the different cohorts and didn't share with higher income consumers. Just curious within that that group how sticky you think those customers are in the longer term. We're seeing a couple quarters of trend that they look to be sticky, but it's only a couple quarters, so we'd seen a pretty sizable trade down over a number of quarters and now we're seeing good retention. We measure retention over a two-year period, so we haven't laughed the trade down impact yet, but we like the trend we're seeing a lot. Alright, that's helpful, thanks guys. Thanks, Josh.
Unknown Executive: Thank you, and as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone.
Brad Thomas: Our next question comes from the line of Brad Thomas from Keybank Capital Markets. Your question, please. I want to talk about the real estate opportunity ahead. You know, when we think about some of the big lots of closures that are happening and additional ones may happen on the horizon, I was hoping you could talk a little bit about your bandwidth to perhaps take on opportunistic real estate opportunities. And how many stores would be too many?
Brad Thomas: At what level do you worry about your ability to source these new stores? How much could you take them on and perhaps tuck them away for the next couple of years? Just how are you thinking about things if we do find ourselves with many more store locations that might be opportunities for you all?
John Swagert: Yeah, Brad, I'll answer it. And then I think Eric will probably add some to it. With regards to how many I don't know at this point in time, how many we think we could take and talk for a year, you know, two or three year period. I don't think that's very feasible. I think that's riskier than it is beneficial. So we would probably not be interested in trying to do something of that nature that just adds a lot of pressure on our overall core business and our ability to run it.
John Swagert: So, you know, trying to carry the dead rent of stores for a long period of time is not beneficial to us. And the way we look at it today in terms of our ability, how many we could open and accelerate and let Eric take that piece of it. Yeah, I think just to follow up on dead rent, we're considering every angle on this. So it really depends on how attractive the occupancy costs and, you know, what the sort of the penalty of dead rent would be that the cadence of the store openings is critical to acceleration.
John Swagert: So if there's enough inventory of stores out there that we can get at, opening a cadence that's a little bit more even quarter to quarter because the ability to accelerate rather substantially. We're very aggressive in the process of any surplus locations that are out there, any announced closures. We've been able to navigate now the bankruptcy process through our experience with bedbath and beyond as an example and 99% only. So we're becoming very proficient at this.
John Swagert: We're not setting necessarily a limit on how many stores we would open as part of the acceleration, but we do believe it can't be meaningful. And we will ensure whatever acceleration we ultimately commit to based on opportunities in front of us that we do not risk the execution of our core business.
Eric Valk: That's really helpful.
Eric Valk: And you talked about the trends and how the consumers performing, but as we look to the all important holiday season, could you talk a little bit about perhaps any merchandising opportunities that you have and any nuances that you're seeing and how the customer shop in your source today is it relates to how for you may play out? I think Brad, that's probably very speculative for us to comment on. I would tell you we believe we're very well positioned for the holiday season.
Eric Valk: Our merchants have done a great job getting the inventory that we believe is right for the customer at the right values. So I think we're set to win. But I think it's a little too early to speculate on anything else at this point in time. Yeah, I would I would add that we're very excited about our seasonal sort of men and our toy sort of moving into the holiday season and we have some evidence of early selling on the seasons that are kind of the pre prelude to Christmas.
Eric Valk: And we really like overseeing and it's getting us more excited about what's flowing into stores will start setting Christmas actually next week. So excited to see what comes out of that that business season only and toys.
Unknown Executive: Very helpful. Thanks so much. Thanks, Brad. Thank you.
Eric Cohen: And our next question comes to the line of Eric Cohen from Gordon ask your question, please. Hi, thanks. Good morning. You talked about more retailers are closing stores and the closeout market is growing and your skills improving. Are you seeing deeper deals bigger deals with your existing vendors? Are you adding new vendors with new categories to the store and with a lot of store clothing is going on now. Have you been able to capitalize on any of the vendors that were with them that you didn't have relations with previously?
Eric Valk: Eric, I'm only going to comment that I would tell you we are seeing a great deal flow. We're seeing some additions to our offerings from new relationships with vendors and the deals we're seeing out there are very compelling and we're very excited what we're getting out there. Great.
Rob Helm: And you didn't have a comment on shrink. I think it was running like a hundred basis points ahead of so pre pandemic levels just curious where that is now and then as that sort of normalizes could that be gross margin upside to the 40% over time or would you likely reinvest that back into the business? Eric, this is Rob. Shrinks pretty much hit a plateau. We've kind of been at this level for a bit now.
Rob Helm: We're working hard as possible to mitigate it. You know, we've talked about it. It's a local hyper local problem and we're putting resources into those hyper local markets to mitigate it. But so far, you know, we've been pretty flat to where we've been over the last couple quarters. From a tailwind perspective, our model has always been to deliver a 40% gross margin and then reinvest and price above that. At this moment as competitors are struggling and consumers are pinched, we would continue to do that in the near term. Thank you.
Jeremy Hamblin: And our next question comes from the line of Jeremy Hamblin from Crick Howell.
Jeremy Hamblin: Your question, please. Thanks, and I'll add my congratulations on the strong results. I want to come back to the real estate question and think about in terms of if you accelerated real estate plans because there are 300 roughly 300 locations closing. I mean, you noted it only about a third of them are in your current trade areas. You have just opened up a new DC in Illinois. In terms of thinking about where you might go after locations and you've had some success or hopefully had some success with a 99 cent only.
Jeremy Hamblin: Would you potentially add into new trade areas in these real estate opportunities that are coming or would you exclusively focus on areas that you already currently have markets in? Jeremy, yes, kind of sort of like we're committed to contiguous growth. So contiguous states will consider to our current trade areas. We think given the size of the opportunity we should have a meaningful opportunity in our current trade areas and there are plenty of locations that will make sense in existing trade areas. In general, even in a state like Pennsylvania, where we're most saturated, we have opportunities to open additional stores. So our focus is on existing trade areas, but we're considering contiguous states.
Jeremy Hamblin: Got it.
Rob Helm: And just a quick follow up to that. I know it's a bit forward looking, but in terms of thinking about, you know, CapEx budgets and the potential range of outcomes that you might have in 2025. You know, now that you're past the DC opening, what would you suggest was kind of the range of potential CapEx? You know, given the potential for real estate acquisition? It's really hard to tell in this moment.
Rob Helm: We don't have a lot of information besides the 296 closures that have been reported. You know, there's the potential for other other things to happen. So we've got to really see, you know, what what happens there and then respond to it. You know, it's broadly, you know, our CapEx assumption for next year, you know, based on what we see today is probably 2.5% of our net sales somewhere in that range. But we certainly have the financial strength to be able to flex that up if required.
Rob Helm: And Jeremy, just to add, I don't think it's prudent to speculate on what could be. That's not how we operate the business and how we plan. So it's great to talk about, but it's not something where we're going to commit to or speculate at this point in time either.
Jeremy Hamblin: Great. Appreciate the color best wishes. Thank you.
Unknown Executive: And as a reminder, ladies and gentlemen, if you do have a question at this time, please press star 11 on your telephone.
Melanie Nunez: Our next question comes to the line of Melanie Nunez from Bank of America.
Eric Valk: Your question, please. Hi, good morning. Thanks for taking my question. I just wanted to ask quickly on the 99 cents only stores. I know you've opened a handful of them. Just curious how those have been performing, if they're in line with expectations, and if there's any update to the economics of those that you previously laid out. Thanks.
Eric Valk: Sure. Hi, Melanie, Eric. We only have about a week behind her belt on a couple of stores in a day on some others. We've opened half of the 99 cents or stores to date. We took a little bit of a different approach with this since it was in acquisition, and we were on the hook for the ownership or the rent immediately. We actually soft opened these stores and haven't run our grand opening event, which will run in late September.
Eric Valk: We're including some of our existing stores in that market. The answer is it's too early to tell, but we're pretty excited about the results. It seems we're getting a very meaningful positive response from customers. We're also excited, and I mentioned it in my opening remarks, about our ability to market to the previous customers of 99 cents only stores and get that message out to them through our various digital channels with our enhanced capabilities in that space and let them know that we're here now in that former 99 cents only space. And so far, we like the results we're seeing there as well.
Unknown Executive: Great. Thank you.
Unknown Executive: And then if I can just follow up on any trends you saw by geographic region during the quarter, thanks. In terms of region, we were pretty strong across the board. I would say that if anywhere to call out significant strength, we probably saw the most strength in our our southern states in Texas and those areas. Thank you.
Simeon Gutman: And our next question comes from the line that was to me and Gutman from Morgan Stanley. Your question please. Good morning, everyone. I wanted to ask on product mix and gross margin through the back half seasonal and toy. I'm sure that's always a decent part of the mix as you get into the third and the fourth quarter. What is the implication on gross margin? And is there any expectation that it's a good guy or a bad guy based on the volume that you expect within each category?
Simeon Gutman: And if I heard correctly that I thought maybe I heard some gin merge categories hurt the product mix this quarter can just clarify that and why would that be the case? Yeah. The margin impact for Q2 was impacted from the room air, which is predominantly air conditioners, which has a lower margin profile than a lot of other categories. And we called out consumables, which would have been specifically related to more on the cleaning front.
Simeon Gutman: So that normally carries a lower margin profile as well. So those would have been a slight drag tool. We normally would have reported to you in Q2 definitely seasonal and toys would have a higher margin profile than those two categories. So there's not a drag expected from our seasonal categories whatsoever in Q3 and 4. But we'll continue to drive the business. We don't expect the same pressure as we saw in Q2 to replicate in Q3 and 4 from the categories perspective.
Simeon Gutman: Okay. That's helpful. Can I ask? Are you seeing signs of the consumer strain at all? I know you mentioned you're seeing and strength from every income cohort, but are there any signs based on the categories in which you're selling the consumers hurting more? And then you're just taking shares as a store and as a channel? Well, I go ahead, Eric. Simeon, it's Eric, that the only sign of weaknesses in big ticket categories, which has continued now for, I don't know, a couple of years.
Simeon Gutman: So, pouring category mattresses, furniture, there's weaknesses in those categories, and I think it continues to be weak across the entire industry. We offer extremely strong value across all categories, and the strength of the value resonates across all income groups. Okay, thank you. Add one thing to it Simeon, I think that's why we're winning. You know, we're definitely, I think there's the consumer stress, but that's why all these is here to serve and we're serving them very well. Appreciate it. Thanks. Good luck. Thank you.
Paul Lejuez: And our next question comes from the line from city, your question, please. Hey, everyone, this brand sheet of month for Paul. I was hoping we could dig in on the ally days liquidation back in two queues that I think you normally run. You know, how did that compare to what you're expecting? Did you see the consumer gravitate more towards those deals? And did that have any impact on gross margin in the quarter of your expectation?
Rob Helm: I'll answer the first part, but then I need to repeat the second part from an ally days events perspective. We were pleased with all these days, just like we were pleased with the comp in the quarter and our results. So strong events again this year and no concerns there. No one expected the impact on margin. I think it's what you're getting at. Yeah, it was around gross margin. If there was any impact on gross margin from that event, potentially being stronger than you anticipated. Okay.
Rob Helm: I was hoping if you could expand on the co-branded credit card, you mentioned your launching anything you share on the terms there in margin impact that you start to roll that out or marketing expense consideration. Sure, this is Rob. We're excited about the card in our expectation is that the card holder should we should see a modest uplift in their baskets and their spend similar to how we see an uplift for all these army customers.
Rob Helm: We'd expect for that to be nicely accreted through our comps. We are rolling it out over the course of the next few months. So we're expecting very limited impact of fiscal 2024. And should have some data to better guide how we're thinking about it for 25. From a margin implication perspective, we'd expect for it to be slightly accreted to our margin rate. If the card features a royalty and membership bonuses with the court with the court company, which is what we drive that.
Rob Helm: For most excited about it, I mentioned in my opening remarks is the value proposition of the always army customer. It's enhanced value of the program itself. We believe it's going to track new members as well as a result of the strength of the offering.
Brandon Cheatham: And if I could just ask one more, you mentioned that you are looking at full-time employees or sports time employees, is there potential for that to be a potential headwind or that be a tailwind if you are converting more to full-time, getting more productivity out of your associates? Yeah, we, Brandon, it's Eric. We look at it more as a tailwind, but it's really about better executing the store, which is going to drive top line over time.
Brandon Cheatham: It's not necessarily an SG&A-related initiative, although it could be slightly creative or perhaps it offsets any wage pressure that we may see in the future. But we look at it as more execution focused because that full-time associate is more committed to us, more career-oriented, looking to advance in our company, turnover is significantly lower for full-time associate versus a part-time associate. It results in better execution. Thanks, Hans. Thanks, and a good look. Thanks, Brandon. Thank you.
John Swagert: And this does conclude the question and answer session of today's program. I'd like to hand the program back to Mr. John Swagger, for any further remarks. I would like to thank everyone for their time and interest in all these. We look forward to updating you on our continued progress on our next earnings call. Thank you, and have a great day. Thank you, ladies and gentlemen, for your participation in today's conference.
Unknown Executive: This does conclude the program. You may now disconnect. Good day.