Q4 2024 Ollie's Bargain Outlet Holdings Inc Earnings Call - Q&A
[inaudible]
John Swygert, John Swygert, John Swygert,
Speaker Change: Good morning and welcome to Ollie's Bargain Outlet Conference call to discuss financial results for the fourth quarter at Fiscal Year 2024, currently all participants are in listen only mode. Later we will conduct a question and answer session and interactive instructions will be provided at that time. Please be advised that this call is being recorded and the reproduction of this call in whole or in part is not permitted without the express written authorization of Ollie's.
Speaker Change: These statements are made today as of the date of this call and we do not undertake any obligation to update these statements on today's call. The company will also refer to certain non-GAAP financial measures reconciliation of the most closely comparable GAAP financial measures to non-GAAP financial measures are.
Speaker Change: Included in our earnings press release with that said I'll now turn the program over to Mr. Madrigal. Please go ahead Sir.
Madrigal: Good morning. Thank you for your interest at Ollie's, our teams did a great job of delivering strong fourth quarter results.
Speaker Change: Setting us up for accelerated growth.
Speaker Change: Our fourth quarter comparable store sales growth of two 8% was in line with our expectations and we delivered better than expected adjusted earnings. We are particularly pleased with these results given the compressed holiday season, which required a back to back add calendar and raised the operational complexity of the quarter our team.
Speaker Change: Executed very well and we were ready for the surge in demand that we saw in the days leading up to Christmas.
Speaker Change: In fact December was our strongest month of the quarter.
Speaker Change: <unk> remained under pressure and are seeking value. Many retailers are closing stores or shutting down entirely tariffs are creating uncertainty across the retail landscape. This all bodes well for ollie's as a closeout retailer we are constantly looking for the best product opportunities in the market. The same goes for.
Speaker Change: How do we think about investing our capital to drive long term shareholder value with somebody retailers closing stores or going bankrupt in the past year. There are a considerable number of abandon customers merchandise real estate and talent in the marketplace. We think there's an opportunity to take out some of these assets in a manner that strengthens our.
Speaker Change: Our competitive positioning broadens, our footprint and bolster shareholder returns for years to come.
Speaker Change: We recently announced an agreement to acquire 40 additional store leases a former big lots of locations. These stores are the right size located in our existing trade areas that have been serving a value oriented shopper for many years. In addition, they come with below market rents and long term leases that give us control of these properties for <unk>.
Speaker Change: Upwards of 20 to 30 years.
Speaker Change: As a result, these stores are capable of generating generating outsized profitability over the long term.
Speaker Change: What are the hallmarks of ollie's is our ability to generate profitable growth and consistent returns for our shareholders.
Speaker Change: This is a very stable business model. The closeout market is massive and there will always be merchandise available for a variety of reasons innovation packaging changes shifting consumer demand and store closures tariffs uncertainty and other unforeseen events. These are just some of the drivers.
Speaker Change: So the closeout market.
Speaker Change: While sources of products are constantly changing the availability of closeouts is stable and consistent with.
Speaker Change: With our flexible buying model, we are in control of what we buy and when we buy it if a product is not meet our requirements either from a pricing quality or brandy perspective, we simply don't buy at price is certainly a very important component to our value proposition, but it's not the only coupon.
Speaker Change: We deliver value to our customers through a unique and ever changing assortment of products that combine price quality and national brands selling good stuff cheap has been our purpose since our founding over 42 years ago and this remains our passion and motivation to this day.
Speaker Change: In closing, let me just say how excited about the future of ollie's with our strong value proposition flexible by model profitable and portable store concept fortress balance sheet and talented hard working associates, we are well positioned to continue driving profitable growth.
Speaker Change: Now on to Rob, who will discuss our fourth quarter results and guidance for the new fiscal year Rob.
Rob: Thanks, Eric and good morning, everyone.
Speaker Change: We were pleased with our results and trends in the fourth quarter.
Speaker Change: We grew comparable store sales in line with expectations and deliver adjusted earnings ahead of our expectations. Despite facing some pressure from unfavorable weather and the liquidation of the big box stores.
Speaker Change: Before we run through the numbers. It's also important to point out that there are some transitory expenses related to bankruptcy acquired stores and our accelerated growth.
Speaker Change: While this puts a little pressure on our near term earnings growth. It should also lead to stronger earnings power for 2026 and beyond.
Speaker Change: In the quarter net sales increased 3% to $667 million driven by new stores and comparable sales growth, partially offset by the impact of last year's 50 <unk> week.
Speaker Change: As a reminder, the 50 <unk> week generated $34 million in sales and about <unk> <unk> to earnings per share last year.
Speaker Change: Excluding the extra week of sales in the comparison net sales increased eight 5%.
Speaker Change: Comparable store sales in the fourth quarter increased two 8% driven by fairly equal increases in both transactions and basket.
Speaker Change: Our best performing categories in the quarter were housewares, food and candy electronics and rumor.
Speaker Change: Ollie's Army members increased over 8% to over $15 1 million members in the quarter and sales to our members represented over 80% of total sales.
Speaker Change: Consistent with prior trends, we continue to drive growth in our younger customer demographic and the retention of higher income customers.
Speaker Change: We ended the quarter with 559 stores in 31 states, an increase of 9% year over year.
Speaker Change: We opened 13, new stores in the quarter and 50 for the fiscal year.
Speaker Change: Our new stores continue to perform well, including the former 99, then only stores in the first wave of acquired big lots stores.
Speaker Change: Gross margin increased 20 basis points to 47% primarily from lower supply chain costs, partially offset by a slightly lower merchandize margin driven by mix.
Speaker Change: SG&A expenses of $170 million included a onetime expense of $5 5 million for the accelerated expense, resulting from the modification of existing equity awards for our executive Chairman exclude.
Speaker Change: Excluding this one time expense SG&A as a percentage of net sales increased 50 basis points to 24, 6% primarily from our accelerating store growth and the earlier timing of new store openings in fiscal 2025.
Speaker Change: Preopening expenses were $5 million in the quarter most of the increase from the earlier most of the increase was from the earlier timing of new store openings compared to fiscal 2024.
Speaker Change: We have already opened 16 stores in fiscal 2025. This time last year, we had not even opened a single store yet.
Speaker Change: Dark rent associated with the bankruptcy acquired stores also contributed to the increase in Preopening expenses and it was $1 million in the quarter.
Speaker Change: Moving down to the bottom line adjusted net income and adjusted earnings per share were <unk> $73 million and $1 19, respectively.
Speaker Change: Lastly, adjusted EBITDA was $109 million and adjusted EBITDA margin was 16, 4% for the quarter.
Speaker Change: Turning to the balance sheet, our financial position remains very strong.
Speaker Change: Cash and short term investments were $429 million at the end of the quarter and we had no outstanding borrowings under our revolving credit facility.
Speaker Change: Our strong balance sheet is a strategic asset for us in 2024, we were able to deliver against our expectations, while setting our path to accelerated growth in 2025, we opportunistically acquired a number of stores out of bankruptcy began building the inventory to fill the stores and made the necessary investments in our supply chain.
Speaker Change: All while remaining committed to our share repurchase program.
Speaker Change: Inventories increased 9% year over year, primarily driven by our accelerating store growth and the earlier cadence of new store openings in 2025.
Speaker Change: On a per store basis inventories were relatively flat year over year.
Speaker Change: Capital expenditures totaled $24 million for the quarter with the majority of the spending going towards the opening of new stores, the maintenance of existing stores and enhancements to our distribution centers.
Speaker Change: The big loss locations were generally well maintained and have required limited build out expenses to open thus far.
Along with earnings today, we also announced a new $300 million share buyback program in a separate press release.
While accelerated growth as our primary focus in the short term, we remain committed to returning capital to our investors through share repurchases, while balancing our strategic growth opportunities and working capital needs.
Speaker Change: Lastly, let me provide some commentary on our initial outlook and how we're thinking about the upcoming fiscal year.
Speaker Change: As most of you know our long term annual growth algorithm is 10% unit growth.
Speaker Change: Comparable store sales growth of 1% to 2%.
Speaker Change: Gross margin of 40%.
Speaker Change: Slight SG&A expense leverage as a percentage of sales.
Speaker Change: The modest benefit from share repurchases and investment income, resulting in low double digit adjusted earnings growth.
Speaker Change: With the acquisition of the former Big lots stores, we are uniquely positioned to accelerate our growth and gain market share.
Speaker Change: As Eric discussed we have been building up to this moment and are well positioned to take advantage of this unique opportunity.
Speaker Change: Our current plan is to open approximately 75 new stores this year.
Speaker Change: New store openings will be more heavily weighted to the first half with approximately 21 stores in the first quarter at 65% in the first half.
Speaker Change: The big lock locations will incur a higher preopening expenses, because we take possession of these earlier than a typical opening.
Speaker Change: The dark red is expected to be around $5 million for the year or <unk> to adjusted earnings per share.
Speaker Change: We have included all of this in our initial guidance and will also quantify the dark rent expenses related to the acquired big loft locations as we report the quarters.
Speaker Change: Not included in our guidance is any benefits of comparable store sales from the big lots stores closures.
Speaker Change: We remain confident that this will be a net benefit to us in fiscal 2025, but it's difficult to predict how and when this will play out.
Speaker Change: The majority of the big lots stores are still in the process of closing or have very recently just closed and our sample size is still relatively small.
Speaker Change: And the handful of overlapping markets, where the big lots stores have been closed for longer than a few weeks our stores in these markets are comping better than our stores outside of those markets.
Speaker Change: With all that said our initial guidance for fiscal 2025 is the following.
Speaker Change: Approximately 75, new store openings.
Speaker Change: Total net sales of $2 $5 64 to $2 $5 6 billion.
Speaker Change: Comparable store sales growth of 1% to 2%.
Speaker Change: Gross margin of approximately 40%.
Speaker Change: Operating income of $283 million to $292 million.
Speaker Change: Adjusted net income of $225 million to $232 million and adjusted net income per diluted share of $3 65 to $3 75.
Speaker Change: These estimates assume.
Speaker Change: Depreciation and amortization expenses of $54 million inclusive of $14 million within cost of goods sold.
Speaker Change: Pre opening expenses of $21 million, which includes dark rent of approximately $5 million related to the acquired big off locations.
Speaker Change: And annual effective tax rate of 25%, which excludes the tax benefits related to stock based compensation.
Speaker Change: Diluted weighted average shares outstanding of approximately $62 million and capital expenditures of approximately $83 million to $88 million, which includes the build out of the big box stores.
Speaker Change: Lastly, let me give you some thoughts on how we are thinking about the quarterly comp cadence.
Speaker Change: The first quarter got off to a sluggish start.
Speaker Change: However, we have seen momentum start to build with the change in the weather.
Speaker Change: As we get further into the year, we face tougher comparisons in June and July from the lapping the strong air conditioner sales last year.
Speaker Change: Then in the back half of the <unk> comparisons start to ease a bit from lapping the big lots store closures.
Speaker Change: As a result, we're thinking that comp growth could be in the lower end of the 1% to 2% range for the first half and the midpoint to the higher end of the range for the 1% to 2% in the back half.
Eric: Now back to Eric Thanks, Rob.
Eric: This is a very exciting time for us at all is the foundation of our success is our people I am very appreciative and proud of what we've accomplished as a result of their hard work and commitment.
Eric: Our people care deeply and find purpose and serving customers and stretching their hard earned dollars. This is especially important in this moment.
Eric: We are already.
Eric: Yes.
Eric: This concludes our prepared remarks.
Eric: We are now happy to answer your questions.
Speaker Change: Certainly and our first question for today comes from the line of Stevens of Kony from Citi. Your question. Please.
Eric: Hi, good morning, Thanks, very much for taking my question.
Eric: Was curious sure SaaS on the consumer you kind of gave some commentary there about how trends have performed quarter to date, but if you take a step back how do you think about the state of your consumer how is that factored into your outlook for 2025.
Steve: Thanks, Steve I appreciate the question.
Eric: Consumers remained under pressure.
Steve: Thrive in this environment.
Steve: All of these as the destination for any type of disruption, whether it's consumers under pressure excess inventory, resulting from store closures tariff pressure.
Steve: People to join our team real estate.
Steve: But back to the consumer our consumable business continues to be a very strong business for us and a traffic driver, which certainly indicative of where the mindset of the consumer is.
Steve: The consumer continues to respond to amazing deals, whether their discretionary categories or non discretionary categories and it all these value always wins.
Steve: Being said big ticket items have been a little softer.
Steve: In terms of household income segments. The trade down continues higher income consumers. We define as over 100000 household income we continue to see that trade down and retention of those customers were seeing continuing to see strong low middle income.
Steve: Cohort at the $40 to 65000 of our range and our low income cohort has been stable.
Steve: Okay. Thanks for that my follow up on gross margin. So you came in better than your 40% Algo. The guide is for 40%. This year can you just help us think through the puts and takes that can supply chain costs. There will be a good guy as you think about 2025.
Steve: Sure Steve.
Steve: From a gross margin perspective, I would say that our algo is 40% anytime that we.
Steve: See ourselves exceeding 40% we reinvest in.
Steve: The customer and pricing to drive loyalty.
Steve: From a supply chain perspective, we're planning for a mostly stable environment. So.
Steve: The supply chain costs will be flattish year over year aside from the benefit we get from burning in the.
Steve: Princeton DC that we opened last year.
Steve: We have planned for shrink Sim.
Steve: Similar to how we've planned for shrink.
Steve: In 2024, although we're starting to see.
Steve: B, the shrink headwind soften a little bit over the last.
Steve: <unk> 200 stores or so that we've counted.
Steve: From a from a buying getting back to <unk> in a buying perspective.
Steve: We expect that the buying environment could be quite good.
Steve: Coming into the mid year into the back half.
Steve: Some of it is this slowdown in consumer demand.
Steve: And sales for some other full price retailers start to play out the tariff impact starts to play out. So we're we're very we're overall, we're very comfortable with our 40% gross margin considered some small tariff impact in there in the short term.
Steve: And we think we are ready to deliver for 2025.
Steve: Great. Thanks for all the detail.
Steve: Thanks, Steve.
Steve: Thank you.
Speaker Change: Next question comes from the line of Chuck Grom from Gordon Haskett. Your question. Please.
Steve: Hey.
Eric: Eric Good morning, Rob.
Speaker Change: On the Biggie front, what's the headwind to sales commensurate what's your plan of about 50 basis points in the fourth quarter and more recently now that liquidations of past that most of the locations have you seen an inflection in sales and then just bigger picture zooming out would have been the biggest learnings thus far on the big lots from from a from an operational.
Eric: And talent from.
Eric: Sure I'll take the first part I think Eric will take the second part.
Eric: The big lots impact was not quite what we expected.
Eric: When we guided the quarter and the early part of December we did not anticipate or foresee.
Eric: The deal with <unk> falling through so the complete closure of the chain.
Eric: Liquidation in January and February was not something that we planned quarter guided too.
Eric: And just to get a level set everyone on what actually occurred in the quarter.
Eric: We started to see some small benefit in comps in surrounding stores.
Eric: From the store closures that closed in October and November that was about 100 stores.
Eric: And then we had about 100 stores that liquidated in the fourth quarter.
Eric: We didn't see as much of a headwind as we anticipated.
Eric: It appears that those stores were relatively starved of fresh inventory for holiday and that inventory was diverted to the go forward chain.
Eric: When they made the announcement at the end of December and then the ensuing liquidation in January and February.
Eric: We saw quite a bit of a headwind relative to that however.
Eric: January and February also overlap some really unseasonably cold weather and winter storms. So it's very hard to parse out what the exact.
Eric: The impact of the liquidation was.
Eric: January and February now that we've cleared the liquidation and the weather is changing we have seen quite a step change in our momentum and our comps and still hard to parse out.
Eric: So we did not embedded into our guidance.
Eric: As you folks know we are relatively conservative folks.
Eric: We like to.
Eric: Continue to deliver for our shareholders and our investors.
Eric: So we thought it prudent to give the 1% to 2% guidance.
Eric: But if you take a step back on the total market share opportunity for big lots.
Eric: It is a very unique situation, where big lot Didnt really close too many stores as they struggled over the last couple of years.
Eric: And their last reported annual revenue base was in the range of $4 5 billion. So when you take you take into account they did about 25% of their business in furniture.
Eric: And you subtract that out and then you subtract out the markets that we're not in which there is about an 80% to 85% overlap on the original big lots fleet.
Eric: In our store base, you get to a number thats.
Eric: A $2 7 billion dollar addressable market share opportunity and we like our chances to grab that market share as much as anyone.
Chuck: Yes, Chuck the second part of your question on operational.
Eric: Related to operational.
Speaker Change: Lineup with big lots of employees.
Speaker Change: We are we've had a lot of success in recruiting leaders, especially in the field store leaders and district.
Speaker Change: A district level.
Speaker Change: Operationally the companies were similar enough that big lots people when they come into the ollie's environment hit the ground running they certainly have.
Speaker Change: Some very great people.
Speaker Change: We're very happy that we've been able to recruit them and have them join our team. It helps us to run fast, especially in some of these new stores that we're picking up the former big lots stores, we're picking up leaders and associates in those stores. It helps us to get a faster more meaningful start as we Grand open.
Speaker Change: Those stores.
Speaker Change: We're also finding that the conversion of big lots stores two in all of these stories, even a little easier than we expected, it's going faster and potentially is.
Speaker Change: Fairly economical so all things are lining up very nicely for us.
Speaker Change: All those big lots stores that are now in our pipeline to convert to Ali's in 2025.
Speaker Change: Great answer that's great to hear.
Speaker Change: Just a quick follow up just can you can you discuss the progress you've made with the rollout of the private label credit card.
Speaker Change: Maybe how many states are stores now offer the card.
Jonathan: Do you guys still there Jonathan Hello, Yes here can you hear me, yes, I think Chuck cut out, but I sure. We understand the question around the credit card is everyone else Dawn I guess, yes, everyone has to find an answer.
Speaker Change: Right excellent we just lost track of the credit card.
Speaker Change: We've rolled it out to most stores by the end of Q1, we will have rolled it out to the chain.
Speaker Change: It's too early to report it on what it's going to ultimately mean to our business, we love it as an enhancement to our Ollie's Army loyalty program.
Speaker Change: And were seeing initially the basket size for <unk> credit card customer is.
Speaker Change: Fairly significantly higher than the basket size for at Ollie's Army customer, who does not have a credit card. So.
Speaker Change: It looks very promising bite into Q1 will be rolled out to the whole chain and we'll see what it means for the balance of the year.
Speaker Change: Thank you and our next question comes from the line of Alexia Morgan from Piper Sandler Your question. Please.
Speaker Change: Hi, This is Alexia Morgan on for Peter Keith Piper Sandler. Thank you for taking my question.
Speaker Change: I was wondering if you could speak more to the dead rent dynamic on a going forward basis.
Speaker Change: Quantified grant.
Speaker Change: Million in 2025, so it seems like it could impact flow through this year. So we are wondering how to think about flow through dynamics and the model from 2025.
Speaker Change: <unk> 2020, how that could change.
Rob: Sure I'll take that it's Rob we're very excited about what accelerated growth means for 2025, and what it means for 2026 and beyond.
Rob: The big lots store closures have given us a unique opportunity to really improve our street.
Rob: Jake positioning broaden our footprint and boost our returns.
Rob: The bankruptcy acquired rent stores require that we're on the clock for rent as soon as the stores turned over to us and that model. We have to take on an average about four months of dead rent versus typical always opening which is 4% to five weeks, but these stores come with below market rents and long term leases, which allow for.
Rob: Our outsized profitability for this segment of stores.
Rob: Given that these stores are going to open it midway through the year into the back half of the year, you don't get as much flow through on the on the earnings for the store for the year and it is burdened with the dead rent, which makes it about 300000 or so a store it was a normal year.
Rob: We would deliver say low teens earnings growth and when I am talking about 2026, we'd expect 2026 to be mid teens earnings growth, maybe even approaching high teens earnings growth and cash.
Rob: Casting aside any market share grab or outside of comp that we would deliver in 'twenty five or 'twenty stakes by virtue of.
Rob: Acquiring the big lots of market share aside from the real estate.
Rob: Okay. Thank you.
Rob: And then maybe just one more.
Rob: Had already talked a little bit about the big loss opportunity, but one more about that.
Rob: How are you thinking about the new big lots stores.
Rob: Opening.
Rob: As compared to the new 99% only stores that you had acquired.
Richard: Thank you Richard.
Richard: To be very strong and successful right out of the gate. So.
Speaker Change: Just wondering how did lot story.
Richard: Could you have a similar experience.
Alexia Morgan: Sure Alexia.
Alexia Morgan: We think about the very similarly in fact, we are more bullish on our big lots conversion than we were even on a 99 conversion as you know we were very bullish on 99.
Alexia Morgan: Only conversion.
Alexia Morgan: The biggest attributes.
Alexia Morgan: Two companies.
Alexia Morgan: Provide to us as these or I call them warm boxes, a lot of the real estate, we do traditionally over many years is second generation sites.
Alexia Morgan: That had been vacant for for years, they've been vacant so long you forget who the retailer was that within the box. So cold sites. These are all warm not only are they warm.
Alexia Morgan: They are also more with customers, who have been conditioned discount customers conditioned to shop.
Alexia Morgan: Store concept that similar enough to us and the customer cohort that similar enough to our customers.
Alexia Morgan: So we have.
Alexia Morgan: Just a little bit of experience to date with big lots conversions only a handful have been converted so far but we really like what we're seeing on the conversions in terms of the excitement of the customer.
Alexia Morgan: So the initial sales reads.
Alexia Morgan: We think it will be a stronger even stronger than that and it's only conversions.
Alexia Morgan: Great. Thank you.
Matthew Boss: Thank you and our next question comes from the line of Matthew Boss from Jpmorgan. Your question. Please.
Speaker Change: Great. Thanks, So Eric maybe could you elaborate on the cadence of first quarter to date same store sales. What you saw early versus the exit rate in February and more recent trends you've seen in March and have you embedded any lift in the full year guide for potential market share opportunity tied to big loss.
Matthew Boss: <unk>.
Matthew Boss: Sure Great question, Matt I'm going to ask Rob to address the.
Matt: Hey, Matt how are you February was a pretty tough month.
Speaker Change: There were quite a bit of headwinds there was weather there was the big lots store closures.
There was a delay early on and tax refunds, although that caught up and now started to accelerate and there has been widespread media reports of slowdown in consumer demand. So it's been it was quite volatile.
Speaker Change: That being said we've seen a very recent step change towards the end of February into the early part of March which coincides with the big lots store closures and the change in the weather and we have we have some pretty good momentum at this moment.
Speaker Change: As of now we are running quarter to date.
Speaker Change: In line with our comp guidance for the first quarter.
Speaker Change: But we have a lot of spring selling to go the weather hasnt quite fully changed yet and we're pretty confident that we're going to be able to deliver and as you know you followed the story a long time, we don't turn the registers off.
Speaker Change: Okay got it and then maybe just a follow up Eric could you could you argue ollie's could actually be a net beneficiary of tariffs as we tie in availability and product that youre seeing in and Rob on the SG&A front, if we exclude the dead rent how best to think about the comp.
Speaker Change: Needed to leverage SG&A in 2025, and then multi year, what's the right comp leverage point, you think for the model.
Matthew Boss: So yeah, Matt on tariffs.
Matthew Boss: It's kind of back to how I answered the state of the consumer question tariffs are disruptive.
Matthew Boss: They are especially disruptive when they change moment to moment, we thrive on disruption. So this is the <unk>.
Matthew Boss: Great example.
Matthew Boss: Disruption I think when you look at it in the short term, we're a price follower, we focus on maintaining price gaps to our competitive set delivering strong values. We don't have a mandate to buy anything so if it's priced right.
Matthew Boss: To meet our margin profile.
Matthew Boss: We buy it if it's not price right, we don't buy it its a very flexible model. So we have a business model that is really built for a situation like this where there are various products that are incurring certain expenses, we can choose not to buy them or we could follow the market in terms of price. So.
Matthew Boss: In terms of product availability, absolutely when you look back on the history and our experience with tariffs from some years youre going back.
Matthew Boss: It does result in excess inventory that's available to buy back we would expect that to happen most likely in the back half of 2025, if it follows the same.
Matthew Boss: Pattern that it did back when tariffs were increased.
Matthew Boss: Five ish years ago.
Matthew Boss: From an SG&A perspective.
Matthew Boss: For 2025, we would expect.
Matthew Boss: SG&A leverage to be pretty much at the midpoint of the one 1% to 2% positive comp we operate off of relatively low G&A based and we have the corporate investments in place to be able to support our accelerated growth there may be some some wiggling from quarter to quarter from a from a SG&A expense leverage flow through.
Matthew Boss: Perspective, as we're accelerating growth and we're putting in some of those other field investments to be able to build out new markets, but on the year, we would expect it to be closer to the midpoint.
Matthew Boss: Yeah.
Speaker Change: That's great color best of luck.
Matthew Boss: Thanks, Mike.
Speaker Change: Thank you and our next question comes from the line of Brad Thomas from Keybanc Capital markets. Your question. Please.
Brad Thomas: Thanks, and good morning.
Speaker Change: Just to follow up on Matt's question on tariffs can you talk a little bit more about how those are baked into your guidance overall and the exposure that you have on the direct import side.
Speaker Change: Sure exposure of the direct import side again, very very short term it's.
Speaker Change: It's about 50% of our business that comes out of China, which is primarily where the pressure is although there could be some pressure.
Speaker Change: With other countries in the future China is certainly the biggest.
Speaker Change: Again with that 50% of our business, we're a price follower.
Speaker Change: Theres nothing in that 50% that we absolutely have to buy.
Speaker Change: So.
Speaker Change: We're not overly concerned about it but it does present a little bit of a short term challenge long term, we like our chances in terms of gross margin in guidance, we're very comfortable with our 40% for the year, we've considered some small tariffs impact.
Speaker Change: The.
Speaker Change: Very immediate term, but we believe that in the medium and longer term this will be a great buying opportunity and demand opportunity for us.
Speaker Change: Great and if I could follow up just on <unk>.
Speaker Change: On the store growth outlook looking past 2025.
Speaker Change: Really it feels like you have an incredible pipeline and opportunity in front of you with all the retailers that are closing stores in the United States right now I guess could you just speak to your confidence in driving growth and what you think that rate growth rate will be over the next few years.
Brad Thomas: Sure Brad.
Brad Thomas: Our long term algo is is 10% annual unit growth, we feel very very good.
Brad Thomas: About our pipeline meeting and beating this target.
Brad Thomas: With all the closings that you mentioned the bankruptcies that are out there we had a unique opportunity to accelerate growth good locations below market rent great long term leases. We're prioritizing. These stores. These leases that we picked up through bankruptcies.
Brad Thomas: It pushed out our organic pipeline into late 'twenty five in early 'twenty, six which makes for a very strong set up to 2026.
Brad Thomas: So with a high number of store closures.
Speaker Change: <unk> see the availability of second generation sites that we can pursue outside of bankruptcy and we're absolutely capitalizing on this so we feel very good about both 2025 and 2026 at this point to exceed that 10% long term algo I can't really speak beyond 2020.
Brad Thomas: But we feel very very good about our chances for the next two years.
Speaker Change: Very helpful. Thank you so much.
Brad Thomas: Brad.
Speaker Change: Thank you and our next question comes from the line of Simeon Gutman from Morgan Stanley. Your question. Please.
Speaker Change: Hi, This is Lauren on for Simeon. Thank you for taking our question. Our first one is on the ramp of the 24 megawatt stores you purchased in the back half of 'twenty four could you give any more color early reads from the productivity of these boxes out of the gate and our second question is on just the comp perspective is there anything to call out from the timing of the Easter.
Speaker Change: For this year. Thank you.
Speaker Change: Sure. This is Rob I'll take that one in terms of the big lots of openings. We just opened our first set of big lots stores in February we opened a chunk of stores and.
Speaker Change: Wisconsin, which gave us.
Speaker Change: A ramp in that market very quickly and we're seeing some exciting results there the other stores. It it's really too early to give you any color, but we're fairly confident that they'll open strong out of the gates for the dynamics that Eric mentioned, rather relative to the the warm stores.
Speaker Change: For the second part of the question can you repeat the second part of the question. Please.
Speaker Change: Yes. The second question was just anything to call out on the Easter shift timing for Q1 for sure. So the Easter shift gives us a little bit of an elongated spring selling season right up through the Easter with the weather breaking a little bit later and not quite with.
Speaker Change: With the spring weather it gives us the opportunity to have an elongated spring selling season, which we believe will bode well in our favor.
Speaker Change: Great. Thank you.
Speaker Change: Yes.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Scot Ciccarelli from true as to your question. Please.
Scot Ciccarelli: Good morning, guys I know, it's very early but you did you did comment that the stores near the big lots locations that have closed are comping better than the base can you give us any color on the magnitude of that performance gap.
Speaker Change: I would say that it is.
Scot Ciccarelli: <unk>.
Scot Ciccarelli: It's difficult to say there are a lot of cross wins in cross dynamics, but I would say low single digits to mid single digits for positive mid single digits for for a bunch of them.
Scot Ciccarelli: But we'll give you more color as we clear out past the passenger complete liquidation.
Speaker Change: Got it and then given the acceleration of store openings and 25, what are you guys building in for cannibalization and then how do investors get comfortable that we won't see any kind of operational strains like the company had back during the toys R us.
Scot Ciccarelli: The acquisition date.
Scot Ciccarelli: From a cannibalization perspective, that's something that we were.
Scot Ciccarelli: We're pretty sophisticated on it and we've been.
Scot Ciccarelli: Working through for many years being a high growth retailer, we use an outside party that runs algorithms and math around customer demographics and surrounding existing stores. So that's an important dynamic when making real estate decisions and something that we very much considered when we acquired the big lots stores. So.
Scot Ciccarelli: We view our chances to grow seamlessly with very limited cannibalization is extremely high.
Speaker Change: Got it and on the operational front, yes.
Scot Ciccarelli: What was the question on operations.
Speaker Change: Operationally.
Speaker Change: I mean I know it's before.
Speaker Change: Sorry, Yes 19.
Speaker Change: So.
Speaker Change: In 19 dynamic was a supply chain that did not have the capacity.
Speaker Change: To service the accelerated growth.
Speaker Change: You'll remember back in 19, we didn't have our third distribution center in Lancaster, Texas up and running.
Speaker Change: That was the main challenge that we had in 2019. So we have capacity now with four distribution centers to service up to 750 stores. So are we short of the throughput.
Speaker Change: We have more than enough throughput to service the stores are in the pipeline now.
Speaker Change: <unk> also been investing in our infrastructure some of this in four by the pandemic.
Speaker Change: <unk> surge of business and some of the challenges that we had through the pandemic we've been investing in our in our business to ensure that we have stability in executing as we move forward.
Speaker Change: And those investments are really paying off as we're accelerating growth in 2025.
Speaker Change: Got it thanks guys.
Thank you and our next question comes from the line of Kate Mcshane from Goldman Sachs. Your question. Please.
Speaker Change: Hi, Good morning, I wanted to follow up on the gross margin question that was asked earlier it sounds like merch margins were lower.
Speaker Change: Due to mix and the consumables mix was this more than what you expected.
Speaker Change: Can we expect consumables to weigh on merch margin mix into 2025, and then just a longer term question you've discussed before maybe allowing gross margin go a little bit higher to offset some of the inflation seen on the labor side and SG&A, that's been driving up costs should we not think of that upside potential.
Speaker Change: Any longer for the longer term outlook for gross margin.
Speaker Change: Sure I'll answer that it's Rob.
Rob: We love the consumables business the consumables business is a high frequency high retention business that helps drive.
Speaker Change: The stability of our model.
Speaker Change: And those folks come in for the consumables each week, but they stay and they buy the extra deal.
Speaker Change: Deals as well so consumables is a great business for us to drive our business.
Speaker Change: From a gross margin perspective.
Speaker Change: I would say that it was probably in line with what we'd expected.
Speaker Change: <unk> two turn consumables faster.
Speaker Change: Throughout the course of the last two years.
Speaker Change: Not a real surprise they're.
Speaker Change: Looking ahead to 2025, we have considered this trend and our guidance and we're comfortable with delivering on the <unk> 40, there in terms of rolling higher than the gross margin.
Speaker Change: We're in a moment in time, where we've got a really unique opportunities to grab market share. So.
Speaker Change: Jumping on the price and taking a little bit of extra margin and flow through doesn't seem like the right strategic plan at the moment there'll be a time potentially but by the time, it's not now.
Speaker Change: And on the SG&A front to come back to the other part of your question.
Speaker Change: I'd say that wage.
Speaker Change: And employment and all of those dynamics that we saw.
Speaker Change: Coming out of the pandemic they've started to soften a bit.
Speaker Change: It's putting less pressure on the SG&A rate and less pressure on the need to go up on the gross margin. So right now we're comfortable with the 40, we're going to deliver the 40 this year and we're going to grab market share. Yes, I'd just add one comment we continue to be focused on improving productivity enhancing processes, especially in stores and we look at those.
Speaker Change: Enhancements as an offset to any any incremental wage pressure that we may see in.
Speaker Change: The coming year coming a couple of years.
Speaker Change: Yes.
Speaker Change: Thank you and then our second question.
Speaker Change: Have you quantified that it could be $2 7 billion in addressable sales that were left behind here by the bankruptcy do you have an estimate of how much you can capture over over time or what the transfer rate could look like given your overlap with other retailers.
Speaker Change: I'd say that we stand the benefit from the big lock closures as much as anyone I would imagine that the mass merchants and the dollar stores pick up some share as well, but even if we pick up say 5% of the.
Speaker Change: Of the $2 7 billion.
Speaker Change: Well over $100 million sales opportunity for us, which on our comp base.
Speaker Change: A couple of hundred basis points of positive comp.
Thank you.
Speaker Change: Thank you and as a reminder, ladies and gentlemen, if you do have a question at this time. Please press star one on your telephone. Our next question comes from the line of Anthony <unk> from loop capital markets. Your question. Please.
Anthony: Good morning. Thank you for taking my question, so I couldn't help but notice at the end of your prepared remarks, the timing was a little bit off with the all these Chad is that something that investors should be concerned with.
Speaker Change: Yeah, I love it.
Speaker Change: Really blew it and yes, right you've had some recent changes that we've had to work through in terms of our executive chairman transition, so or anything on the chip.
Speaker Change: Got it fair enough. Thank you.
It was like a mid to high five.
Speaker Change: We will do better work done that might cause them to call out this year.
Speaker Change: So just following up on the question on consumables I mean, one thing I definitely noticed in my store businesses, you always have tide pods right and it.
Speaker Change: It seems like you are.
Speaker Change: Buying a bit more directly from manufacturers and I just wonder if you had any update on that because I definitely agree with you right. If I know I can always go in and get my tide pods that by my tide pods, but obviously I'm, there and im doing the whole treasure Hunt and so that's a benefit for you so any update there.
Speaker Change: Sure I mean, those businesses continue to be strong our size and scale are.
Speaker Change: As we continue to continue to grow along with our <unk>.
Speaker Change: Fortress balance sheet are our big Differentiators in terms of our ability to buy.
Speaker Change: Lot of CPG companies out there like the simplicity of selling all of whatever it is they have to just one.
Speaker Change: Customer whomever whoever that might be and we are the biggest customer for.
Speaker Change: We'd consider closeouts or excess inventory and in CPG I think the other thing to point out Anthony is that.
The consolidation in the closeout space to whatever extent big lots played in it in a meaningful way along with companies like Asics bargain Hunt.
We're we're buyers and consumers of CPG product. So there's more out there now as well which lines up.
Speaker Change: Really nicely too.
Speaker Change: What the consumer is most interested in buying in this moment.
Speaker Change: Got it that's very helpful. Thank you.
Anthony: Thanks Anthony.
Speaker Change: Thank you and our next question comes from the line of Jeremy Hamblin from Craig Hallum Capital Group. Your question. Please.
Jeremy Hamblin: Thanks, and congrats to the team on the on the success I wanted to talk about category performance as we've moved into fiscal 'twenty. Five you noted some choppiness in February and you've you've.
Jeremy Hamblin: Also noted some improvements here in recent weeks since the end of February I wanted to get a sense for where you're seeing some of that category performance.
Jeremy Hamblin: If you could get a little bit granular in terms of where maybe you saw some softness in February and where you've now seen some pick up here as we've moved into March.
Jeremy Hamblin: Yeah sure Hi, Jeremy this is a little more granular than we tend to get like kind of inter quarter category mix, but to an extent that it's following what we saw in fourth quarter, our consumable businesses.
Jeremy Hamblin: Continue to be.
Jeremy Hamblin: <unk> the more discretionary businesses like the big ticket businesses continue to be a drag weather does play a role in the flow of business when youre looking at it across a quarter or even potentially two quarters.
Jeremy Hamblin: Meeting lawn and garden and patio businesses when weather is cooperating those businesses are down and we certainly could see that in the first part of the quarter when we had our normally.
Jeremy Hamblin: Cold inclement weather.
Jeremy Hamblin: Whether people arent out there and there.
Jeremy Hamblin: Fortunately on their lives in their garden are starting to.
Jeremy Hamblin: <unk> invested in furniture or things for outdoor entertaining.
Speaker Change: The other callout to mentioned, we talked about it a little bit earlier is that the shift of Easter.
Speaker Change: <unk> has some advantages, but a little bit of a disadvantage in that Youre Kenny business isn't as strong when youre your Easter when Easter shifts out three weeks so.
Speaker Change: It all works out.
Speaker Change: In the end and we've had great deal flow in Candy. So we think we're going to have a strong finish in those businesses.
Speaker Change: But the flow of the quarter changes a bit with the.
Speaker Change: Very late Easter.
Speaker Change: Got it and then I think you called out Preopening expense as $21 million for the year wanted to see if you could provide us with a little bit more.
Speaker Change: Guidance in terms of.
Speaker Change: How you expect that to play out.
Speaker Change: Or unfold over the course of the year I think you said, 65% of your store openings do you expect in the first half of the year, how do you expect that preopening expense to flow.
Speaker Change: Well, we would expect that Preopening followed the store cadence. So we would expect two thirds of the preopening expense to flow through the first half of the year with the second quarter actually being the highest amount for the year third quarter, we will start to tail off a little bit from there in the fourth quarter should be relatively low.
Speaker Change: We are not currently planning to open any stores in the fourth quarter so that.
Speaker Change: Sure.
Speaker Change: The preopening expenses will be lower there.
Speaker Change: Great. Thanks for the color best.
Speaker Change: Best of luck this year.
Speaker Change: Thank you.
Speaker Change: Thank you and our next question comes from the line of Mark Carden from UBS. Your question. Please.
Speaker Change: Hi, This is Matt <unk> on for Mark.
Speaker Change: I was wondering if you can talk about the 99 stores and when do you think they might reach full sales productivity it sounds like Dave.
Speaker Change: Opened up really nicely and then a quick follow up.
Speaker Change: Couldnt hear if you mentioned how long the lease agreements are for the big lots stores that you acquired thank you.
Speaker Change: Sure Matt.
Speaker Change: In terms of that as I said all leads we opened a mid middle of last year.
You did open strong.
Speaker Change: As you're probably aware, we have a reverse waterfall in terms of how stores typically perform they are stronger than they are opening year.
Speaker Change: Grand opening.
Speaker Change: <unk> the excitement around <unk>.
Speaker Change: Rob.
Speaker Change: The business.
Speaker Change: Stronger initially and then it falls off a bit and then we get to full maturity in year three or four.
Speaker Change: Duffy, it's too early for us to really say kind of where we'll end up to 90 minutes and only stores, but we like where we're at.
Speaker Change: In terms of real estate terms that is.
Speaker Change: One of the most important things that we look at when we look to acquire a lease through bankruptcy if youre buying a lease you want to make sure that it has sufficient term.
Speaker Change: Some of the big lots stores go out as far as 20% to 30 years. So we have great amounts of term on most of the leases that we did acquire and that's actually why we didn't acquire more leases through the bankruptcy process.
Speaker Change: <unk>.
Speaker Change: What we haven't reported on today yet is.
Speaker Change: Approximately 600 big lots stores made it through the bankruptcy auction process and are still vacant and out there for the taking those are those are for the most part stores, where they didn't have term or they had some other restriction that.
Speaker Change: We would not be able to step into the lease. So that's what gives us the confidence in 2026 and beyond to keep the accelerated growth and potentially deliver over 10% algo for second year.
Speaker Change: Yeah.
Speaker Change: That's great. Thank you.
Speaker Change: Thank you. This does conclude the question and answer session as well as today's program. Thank you ladies and gentlemen for your participation you may now disconnect. Good day.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: [music].