OLLI 10-Q Quarterly Report May 4, 2019 | Alphaminr
Ollie's Bargain Outlet Holdings, Inc.
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OLLI 10-Q Quarter ended May 4, 2019

Balance Sheet
Cash Flow
Income Statement
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10-Q 1 form10q.htm 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
Form 10-Q

☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 4, 2019

OR

☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Ollie’s Bargain Outlet Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation)

001-37501
80-0848819
(Commission File Number)
(IRS Employer Identification No.)

6295 Allentown Boulevard
Suite 1
Harrisburg, Pennsylvania
17112
(Address of principal executive offices)
(Zip Code)

(717) 657-2300
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Trading Symbol
Name of each exchange on which registered
Common Stock, $0.001 par value
OLLI
The NASDAQ Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   ☒       No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes   ☒     No   ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒
Accelerated filer  ☐
Non-accelerated filer  ☐
Smaller reporting company  ☐
Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ☐     No   ☒

The number of shares of the registrant’s common stock, $0.001 par value, outstanding as of June 5, 2019 was 63,483,898.

INDEX
PART I - FINANCIAL INFORMATION
Page
Item 1.
1
1
2
3
4
5
Item 2.
14
Item 3.
24
Item 4.
24
PART II - OTHER INFORMATION
Item 1.
25
Item 1A.
25
Item 2.
25
Item 3.
25
Item 4.
25
Item 5.
25
Item 6.
26

ITEM 1 – CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OLLIE'S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)

Thirteen weeks ended
May 4,
2019
May 5,
2018
Net sales
$
324,854
$
275,739
Cost of sales
192,120
162,863
Gross profit
132,734
112,876
Selling, general and administrative expenses
83,332
72,364
Depreciation and amortization expenses
3,409
2,763
Pre-opening expenses
5,209
1,764
Operating income
40,784
35,985
Interest (income) expense, net
(145
)
538
Loss on extinguishment of debt
-
100
Income before income taxes
40,929
35,347
Income tax expense
2,212
4,893
Net income
$
38,717
$
30,454
Earnings per common share:
Basic
$
0.61
$
0.49
Diluted
$
0.59
$
0.46
Weighted average common shares outstanding:
Basic
63,188
62,169
Diluted
66,176
65,624

See accompanying notes to the condensed consolidated financial statements.

OLLIE'S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
(Unaudited)

Assets
May 4,
2019
May 5,
2018
February 2,
2019
Current assets:
Cash and cash equivalents
$
58,511
$
27,614
$
51,941
Inventories
329,065
276,040
296,407
Accounts receivable
961
414
570
Prepaid expenses and other assets
5,723
8,132
9,579
Total current assets
394,260
312,200
358,497
Property and equipment, net of accumulated depreciation of $64,446, $53,276 and $60,433, respectively
134,498
55,647
119,052
Operating lease right-of-use assets
273,099
-
-
Goodwill
444,850
444,850
444,850
Trade name and other intangible assets, net of accumulated amortization of $0, $1,909 and $2,160,  respectively
230,559
232,555
232,304
Other assets
2,022
2,084
4,300
Total assets
$
1,479,288
$
1,047,336
$
1,159,003
Liabilities and Stockholders’ Equity
Current liabilities:
Current portion of long-term debt
$
197
$
10,143
$
238
Accounts payable
92,738
75,420
77,431
Income taxes payable
9,429
10,858
7,393
Current portion of operating lease liabilities
50,955
-
-
Accrued expenses and other
58,773
47,067
65,934
Total current liabilities
212,092
143,488
150,996
Revolving credit facility
-
-
-
Long-term debt
413
13,926
441
Deferred income taxes
55,424
57,094
55,616
Long-term operating lease liabilities
222,976
-
-
Other long-term liabilities
7
7,113
9,298
Total liabilities
490,912
221,621
216,351
Stockholders’ equity:
Preferred stock - 50,000 shares authorized at $0.001 par value; no shares issued
-
-
-
Common stock - 500,000 shares authorized at $0.001 par value; 63,492, 62,358 and 63,015 shares issued, respectively
63
62
63
Additional paid-in capital
607,241
587,857
600,234
Retained earnings
381,158
237,882
342,441
Treasury - common stock, at cost; 9 shares
(86
)
(86
)
(86
)
Total stockholders’ equity
988,376
825,715
942,652
Total liabilities and stockholders’ equity
$
1,479,288
$
1,047,336
$
1,159,003

See accompanying notes to the condensed consolidated financial statements.

OLLIE'S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders’ Equity
(In thousands)
(Unaudited)


Common stock

Treasury stock


Additional
paid-in


Retained


Total
stockholders’

Shares
Amount
Shares
Amount
capital
earnings
equity
Balance as of February 3, 2018
62,007
$
62
(9
)
$
(86
)
$
583,467
$
213,019
$
796,462
Cumulative effect of adopting ASU 2014-09
-
-
-
-
-
(5,591
)
(5,591
)
Stock-based compensation expense
-
-
-
-
1,600
-
1,600
Proceeds from stock options exercised
312
-
-
-
3,492
-
3,492
Vesting of restricted stock
51
-
-
-
-
-
-
Common shares withheld for taxes
(12
)
-
-
-
(702
)
-
(702
)
Net income
-
-
-
-
-
30,454
30,454
Balance as of May 5, 2018
62,358
$
62
(9
)
$
(86
)
$
587,857
$
237,882
$
825,715
Balance as of February 2, 2019
63,015
$
63
(9
)
$
(86
)
$
600,234
$
342,441
$
942,652
Stock-based compensation expense
-
-
-
-
2,193
-
2,193
Proceeds from stock options exercised
437
-
-
-
6,081
-
6,081
Vesting of restricted stock
56
-
-
-
-
-
-
Common shares withheld for taxes
(16
)
-
-
-
(1,267
)
-
(1,267
)
Net income
-
-
-
-
-
38,717
38,717
Balance as of May 4, 2019
63,492
$
63
(9
)
$
(86
)
$
607,241
$
381,158
$
988,376

See accompanying notes to the condensed consolidated financial statements.

OLLIE'S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)

Thirteen weeks ended
May 4,
2019
May 5,
2018
Cash flows from operating activities:
Net income
$
38,717
$
30,454
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization of property and equipment
4,116
3,309
Amortization of debt issuance costs
104
128
Amortization of original issue discount
-
2
Loss on extinguishment of debt
-
100
Gain on sale of assets
(10
)
(6
)
Amortization of intangibles
-
84
Deferred income tax provision (benefit)
11
(57
)
Deferred rent expense
-
128
Stock-based compensation expense
2,193
1,600
Changes in operating assets and liabilities:
Inventories
(32,658
)
(20,855
)
Accounts receivable
(391
)
857
Prepaid expenses and other assets
(876
)
(188
)
Accounts payable
15,424
1,500
Income taxes payable
2,036
4,823
Accrued expenses and other liabilities
(6,690
)
(6,531
)
Net cash provided by operating activities
21,976
15,348
Cash flows from investing activities:
Purchases of property and equipment
(20,123
)
(4,719
)
Proceeds from sale of property and equipment
16
11
Net cash used in investing activities
(20,107
)
(4,708
)
Cash flows from financing activities:
Borrowings on revolving credit facility
336,965
287,750
Repayments on revolving credit facility
(336,965
)
(287,750
)
Repayments on term loan and finance leases
(113
)
(25,050
)
Proceeds from stock option exercises
6,081
3,492
Common shares withheld for taxes
(1,267
)
(702
)
Net cash provided by (used in) financing activities
4,701
(22,260
)
Net increase (decrease) in cash and cash equivalents
6,570
(11,620
)
Cash and cash equivalents at the beginning of the period
51,941
39,234
Cash and cash equivalents at the end of the period
$
58,511
$
27,614
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
129
$
421
Income taxes
$
163
$
127
Non-cash investing activities:
Accrued purchases of property and equipment
$
5,136
$
1,279

See accompanying notes to the condensed consolidated financial statements.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

(1)
Organization and Summary of Significant Accounting Policies


(a)
Description of Business

Ollie’s Bargain Outlet Holdings, Inc. and subsidiaries (collectively referenced to as the “Company” or “Ollie’s”) principally buys overproduced, overstocked, and closeout merchandise from manufacturers, wholesalers and other retailers. In addition, the Company augments its name-brand closeout deals with directly sourced private label products featuring names exclusive to Ollie’s in order to provide consistently value-priced goods in select key merchandise categories.

Since its first store opened in 1982, the Company has grown to 324 retail locations in 23 states as of May 4, 2019. Ollie’s Bargain Outlet retail locations are located in Alabama, Arkansas, Connecticut, Delaware, Florida, Georgia, Indiana, Kentucky, Louisiana, Maryland, Michigan, Mississippi, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Texas, Virginia and West Virginia.


(b)
Fiscal Year

Ollie’s follows a 52/53-week fiscal year, which ends on the Saturday nearer to January 31 of the following calendar year.  References to the thirteen weeks ended May 4, 2019 and May 5, 2018 refer to the thirteen weeks from February 3, 2019 to May 4, 2019 and from February 4, 2018 to May 5, 2018, respectively.  References to “2018” refer to the fiscal year ended February 2, 2019, which consisted of a 52-week period.  References to “2019” refer to the fiscal year ending February 1, 2020, which consists of a 52-week period.


(c)
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. The condensed consolidated financial statements reflect all normal recurring adjustments which management believes are necessary to present fairly the Company’s results of operations, financial condition, and cash flows for all periods presented. The condensed consolidated balance sheets as of May 4, 2019 and May 5, 2018, and the condensed consolidated statements of income, stockholders’ equity and cash flows for the thirteen weeks ended May 4, 2019 and May 5, 2018 have been prepared by the Company and are unaudited. The Company’s business is seasonal in nature and results of operations for the interim periods presented are not necessarily indicative of operating results for 2019 or any other period. All intercompany accounts, transactions, and balances have been eliminated in consolidation.

The Company’s balance sheet as of February 2, 2019, presented herein, has been derived from the audited balance sheet included in the Company’s Annual Report on Form 10-K filed with the SEC on March 29, 2019 (“Annual Report”), but does not include all disclosures required by GAAP. These financial statements should be read in conjunction with the financial statements for 2018 and footnotes thereto included in the Annual Report.

For purposes of the disclosure requirements for segments of a business enterprise, it has been determined that the Company is comprised of one operating segment.


(d)
Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)


(e)
Fair Value Disclosures

Fair value is defined as the price which the Company would receive to sell an asset or pay to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. In determining fair value, GAAP establishes a three‑level hierarchy used in measuring fair value, as follows:


•
Level 1 inputs are quoted prices available for identical assets and liabilities in active markets.


•
Level 2 inputs are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets and liabilities in active markets or other inputs which are observable or can be corroborated by observable market data.


•
Level 3 inputs are less observable and reflect the Company’s assumptions.

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and its credit facilities. The carrying amount of cash and cash equivalents, accounts receivable and accounts payable approximates fair value because of their short maturities. The carrying amount of the Company’s credit facilities approximates its fair value because the interest rates are adjusted regularly based on current market conditions.


(f)
Recently Adopted Accounting Pronouncements

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases .  ASU 2016-02 requires that lease arrangements longer than 12 months result in an entity recognizing a right-of-use asset and lease liability. The updated guidance is effective for interim and annual periods beginning after December 15, 2018, with early adoption permitted.

The Company adopted ASU 2016-02 as of February 3, 2019 using the modified retrospective transition method, including the option to not restate comparative periods.  As a part of the adoption process, the Company has elected the practical expedients that do not require it to reassess existing contracts to determine if they contain leases under the new definition of a lease, or to reassess historical lease classification or initial direct costs. The Company also adopted the practical expedient to not separate lease and non-lease components for new leases after adoption of the new standard.  In addition, the Company applied a policy election to exclude leases with an initial term of 12 months or less from balance sheet recognition.  The Company did not adopt the hindsight practical expedient and, therefore, will continue to utilize lease terms determined under previous lease guidance.

Adoption of the standard had a material impact on the condensed consolidated balance sheet and related disclosures and resulted in recognition of right-of-use assets of $268.2 million and lease liabilities for operating leases of $269.1 million as of February 3, 2019, while eliminating pre-existing balances for other assets of $6.9 million, deferred rent and tenant improvement allowances of $9.5 million and intangible assets related to favorable leases of $1.7 million which were reclassified to the operating lease right-of-use asset.  The standard did not have a material impact on the Company’s condensed consolidated statements of income, stockholders’ equity or cash flows.  Refer to Note 4 for further details.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)
(2)
Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of merchandise.  Also included in net sales is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.  Net sales are presented net of returns and sales tax. The Company provides an allowance for estimated retail merchandise returns based on prior experience.

Revenue Recognition

Revenue is deferred for the Ollie’s Army loyalty program where members accumulate points that can be redeemed for discounts on future purchases. The Company has determined it has an additional performance obligation to Ollie’s Army members at the time of the initial transaction. The Company allocates the transaction price to the initial transaction and the discount awards based upon its relative standalone selling price, which considers historical redemption patterns for the award. Revenue is recognized as those discount awards are redeemed. Discount awards which are issued upon the achievement of specified point levels are valid for a maximum of 90 days from the date of issuance.  At the end of each fiscal period, unredeemed discount awards and accumulated points to earn a future discount award are reflected as a liability.  Discount awards are combined in one homogeneous pool and are not separately identifiable.  Therefore, the revenue recognized consists of discount awards redeemed that were included in the deferred revenue balance at the beginning of the period as well as discount awards issued during the current period.  The following table is a reconciliation of the liability related to this program (in thousands):

Thirteen weeks ended
May 4,
2019
May 5,
2018
Beginning Balance
$
9,055
$
8,321
Revenue deferred
4,294
2,575
Revenue recognized
(3,939
)
(2,364
)
Ending Balance
$
9,410
$
8,532

Gift card breakage for gift card liabilities not subject to escheatment is recognized as revenue in proportion to the redemption of gift cards.  The rate applied to redemptions is based upon a historical breakage rate.  Gift cards are combined in one homogenous pool and are not separately identifiable.  Therefore, the revenue recognized consists of gift cards that were included in the liability at the beginning of the period as well as gift cards that were issued during the period.  The following table is a reconciliation of the gift card liability (in thousands):

Thirteen weeks ended
May 4,
2019
May 5,
2018
Beginning Balance
$
1,448
$
1,223
Gift card issuances
1,065
908
Gift card redemption and breakage
(1,167
)
(990
)
Ending Balance
$
1,346
$
1,141

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)
(3)
Earnings per Common Share

Basic earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding. Diluted earnings per common share is computed by dividing net income by the weighted average number of common shares outstanding after giving effect to the potential dilution, if applicable, from the assumed exercise of stock options into shares of common stock as if those stock options were exercised and the assumed lapse of restrictions on restricted stock units.

The following table summarizes those effects for the diluted earnings per common share calculation (in thousands, except per share amounts):

Thirteen weeks ended
May 4,
2019
May 5,
2018
Net income
$
38,717
$
30,454
Weighted average number of common shares outstanding – Basic
63,188
62,169
Incremental shares from the assumed exercise of outstanding stock options and vesting of restricted stock units
2,988
3,455
Weighted average number of common shares outstanding - Diluted
66,176
65,624
Earnings per common share – Basic
$
0.61
$
0.49
Earnings per common share - Diluted
$
0.59
$
0.46

The effect of the weighted average assumed exercise of stock options outstanding totaling 145,684 and 124,738 for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively, were excluded from the calculation of diluted weighted average common shares outstanding because the effect would have been antidilutive.

The effect of weighted average non-vested restricted stock units outstanding totaling 29,127 and 26,333 for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively, were excluded from the calculation of diluted weighted average common shares outstanding because the effect would have been antidilutive.

(4)
Commitments and Contingencies

Commitments

On February 3, 2019, the first day of Ollie’s fiscal year 2019, the Company adopted ASU 2016-02, Leases , which requires that lessees recognize right-of-use assets and lease liabilities for all leases on the balance sheet.  Ollie’s generally leases its stores, offices and distribution facilities under operating leases that expire at various dates through 2033.  These leases generally provide for fixed annual rentals; however, several provide for minimum annual rentals plus contingent rentals based on a percentage of annual sales.  A majority of the Company’s leases also require a payment for all or a portion of insurance, real estate taxes, water and sewer costs and repairs, the cost of which is charged to the related expense category rather than being accounted for as rent expense.  Most of the leases contain options to renew for three to five successive five-year periods.  The Company is generally not reasonably certain to exercise renewal options, therefore the options are not considered in determining the lease term, and associated potential option payments are excluded from the lease payments.  Ollie’s lease agreements generally do not contain any material residual value guarantees or material restrictive covenants.

Lease cost for operating leases for the thirteen weeks ended May 4, 2019 and May 5, 2018 was $15.2 million and $12.0 million, respectively, which was classified in selling, general and administrative expenses on the condensed consolidated statements of income.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

The following table summarizes the maturity of the Company’s operating lease liabilities as of May 4, 2019 (in thousands):

2019
$
46,911
2020
54,289
2021
52,737
2022
46,555
2023
41,559
Thereafter
72,751
Total undiscounted lease payments (1)
314,802
Less:  Imputed interest
(40,871
)
Total lease obligations
273,931
Less:  Current obligations under leases
(50,955
)
Long-term lease obligations
$
222,976

(1)
Lease obligations exclude $31.8 million of minimum lease payments for leases signed, but not commenced.

The following table summarizes other information related to the Company’s operating leases as of May 4, 2019:

Cash paid for operating leases
$
15,307
Non-cash right-of-use assets obtained in exchange for lease obligations
17,613
Weighted-average remaining lease term
6 years
Weighted-average discount rate
4.5
%


The Company adopted the new lease standard in the first quarter of 2019 as discussed in Note 1, and as required, the following disclosure is provided for periods prior to adoption.  As of February 2, 2019, the following is a schedule by year of future minimum rental payments required under non-cancelable operating leases, including renewal periods that were reasonably assured and that had initial or remaining lease terms in excess of one year, excluding any payments related to insurance, taxes, or maintenance (in thousands):

2019
$
60,804
2020
56,106
2021
49,226
2022
42,724
2023
34,876
Thereafter
65,218
Total minimum lease payments
$
308,954

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

Related Party Leases

The Company has entered into five non-cancelable operating leases with related parties for office and store locations. Ollie’s made $0.3 million and $0.4 million in rent payments to such related parties during each of the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively.

Contingencies

From time to time the Company may be involved in claims and legal actions that arise in the ordinary course of its business. The Company cannot predict the outcome of any litigation or suit to which it is a party.  However, the Company does not believe that an unfavorable decision of any of the current claims or legal actions against it, individually or in the aggregate, will have a material adverse effect on its financial position, results of operations, liquidity or capital resources.

(5)
Accrued Expenses and Other

Accrued expenses and other consists of the following (in thousands):

May 4,
2019
May 5,
2018
February 2,
2019
Deferred revenue
$
10,756
$
8,532
$
10,503
Compensation and benefits
7,266
6,910
16,438
Insurance
6,831
3,918
6,159
Freight
6,216
4,434
4,496
Sales and use taxes
5,820
4,721
3,464
Real estate related
3,950
3,772
3,748
Advertising
3,821
3,339
5,678
Other
14,113
11,441
15,448
$
58,773
$
47,067
$
65,934


(6)
Debt Obligations and Financing Arrangements

Long-term debt consists of the following (in thousands):

May 4,
2019
May 5,
2018
February 2,
2019
Term loan, net
$
-
$
23,655
$
-
Finance leases
610
414
679
Total debt
610
24,069
679
Less: current portion
(197
)
(10,143
)
(238
)
Long-term debt
$
413
$
13,926
$
441

The Company’s credit facilities (“Credit Facilities”) consist of a $200.0 million term loan (“Term Loan Facility”), which was fully paid as of February 2, 2019, and a $100.0 million revolving credit facility (“Revolving Credit Facility”), which includes a $25.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans. Loans under the Credit Facilities mature on January 29, 2021.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

The interest rates for the Credit Facilities are not subject to a floor and are calculated as the higher of the Prime Rate, the Federal Funds Effective Rate plus 0.50% or the Eurodollar Rate plus 1.0%, plus the Applicable Margin, or, for Eurodollar Loans, the Eurodollar Rate plus the Applicable Margin. The Applicable Margin will vary from 0.75% to 1.25% for a Base Rate Loan and 1.75% to 2.25% for a Eurodollar Loan, based on reference to the total leverage ratio (total debt to adjusting EBITDA, as defined in the agreement).

The Company made voluntary prepayments under the Term Loan Facility totaling $48.8 million during 2018, paying the balance in full.

Under the terms of the Revolving Credit Facility, as of May 4, 2019, the Company could borrow up to 90.0% of the most recent appraised value (valued at cost, discounted for the current net orderly liquidation value) of its eligible inventory, as defined, up to $100.0 million.

As of May 4, 2019, the Company had no outstanding borrowings under the Revolving Credit Facility, with $98.1 million of borrowing availability, letter of credit commitments of $1.6 million and $0.3 million of rent reserves. The Revolving Credit Facility also contains a variable unused line fee ranging from 0.250% to 0.375% per annum.

The Credit Facilities are collateralized by the Company’s assets and equity and contain financial covenants, as well as certain business covenants, including restrictions on dividend payments, which the Company must comply with during the term of the agreements. The financial covenants include a consolidated fixed charge coverage ratio test of at least 1.1 to 1.0 and a total leverage test of no greater than 3.5 to 1.0. The Company was in compliance with all terms of the Credit Facilities during the thirteen weeks ended May 4, 2019.

The provisions of the Credit Facilities restrict all of the net assets of the Company’s consolidated subsidiaries, which constitutes all of the net assets on the Company’s consolidated balance sheet as of May 4, 2019, from being used to pay any dividends or make other restricted payments to the Company without prior written consent from the financial institutions that are a party to the Credit Facilities, subject to certain exceptions.

(7)
Income Taxes

The provision for income taxes is based on the current estimate of the annual effective tax rate and is adjusted as necessary for discrete events occurring in a particular period.  The effective tax rates for the thirteen weeks ended May 4, 2019 and May 5, 2018 were 5.4% and 13.8%, respectively.  The reduced effective tax rate in the thirteen weeks ended May 4, 2019 was primarily the result of an increase in excess tax benefits related to stock-based compensation.  These discrete tax benefits totaled $8.1 million and $3.9 million for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively.

(8)
Equity Incentive Plans

During 2012, Ollie’s established an equity incentive plan (the “2012 Plan”), under which stock options were granted to executive officers and key employees as deemed appropriate under the provisions of the 2012 Plan, with an exercise price at the fair value of the underlying stock on the date of grant. The vesting period for options granted under the 2012 Plan is five years (20% ratably per year). Options granted under the 2012 Plan are subject to employment for vesting, expire 10 years from the date of grant and are not transferable other than upon death. As of July 15, 2015, the date of the pricing of the Company’s initial public offering, no additional equity grants will be made under the 2012 Plan.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

In connection with its initial public offering, the Company adopted the 2015 equity incentive plan (the “2015 Plan”) pursuant to which the Company’s Board of Directors may grant stock options, restricted shares or other awards to employees, directors and consultants. The 2015 Plan allows for the issuance of up to 5,250,000 shares. Awards will be made pursuant to agreements and may be subject to vesting and other restrictions as determined by the Board of Directors or the Compensation Committee of the Board. The Company uses authorized and unissued shares to satisfy share award exercises. As of May 4, 2019, there were 3,133,750 shares available for grant under the 2015 Plan.

Stock Options

The exercise price for stock options is determined at the fair value of the underlying stock on the date of grant. The vesting period for awards granted under the 2015 Plan is generally set at four years (25% ratably per year). Awards are subject to employment for vesting, expire 10 years from the date of grant, and are not transferable other than upon death.

A summary of the Company’s stock option activity and related information follows for the thirteen weeks ended May 4, 2019 (in thousands, except share and per share amounts):

Number
of options
Weighted
average
exercise
price
Weighted
average
remaining
contractual
term (years)
Outstanding at February 2, 2019
3,746,422
$
15.29
Granted
286,849
79.96
Forfeited
(13,504
)
64.25
Exercised
(437,204
)
13.91
Outstanding at May 4, 2019
3,582,563
20.46
5.4
Exercisable at May 4, 2019
2,435,065
10.83
4.3

The Company uses the Black-Scholes option pricing model to value its stock option awards.  The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, stock-based compensation expense could be materially different for future awards.

The expected life of stock options was estimated using the “simplified method,” as the Company does not have sufficient historical information to develop reasonable expectations about future exercise patterns and post-vesting employment termination behavior for its stock option grants.  The simplified method is based on the average of the vesting tranches and the contractual life of each grant.  For stock price volatility, the Company uses its historical information since its initial public offering as well as comparable public companies’ information as a basis for its expected volatility to calculate the fair value of option grants.  The risk-free interest rate is based on U.S. Treasury notes with a term approximating the expected life of the option.

The weighted average grant date fair value per option for options granted during the thirteen weeks ended May 4, 2019 and May 5, 2018 was $24.95 and $18.73, respectively. The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that used the weighted average assumptions in the following table:

OLLIE’S BARGAIN OUTLET HOLDINGS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

May 4, 2019 and May 5, 2018

(Unaudited)

Thirteen weeks ended
May 4,
2019
May 5,
2018
Risk-free interest rate
2.43
%
2.70
%
Expected dividend yield
—
—
Expected term (years)
6.25 years
6.25 years
Expected volatility
25.88
%
25.84
%

Restricted Stock Units

Restricted stock units (“RSUs”) are issued at a value not less than the fair market value of the common stock on the date of the grant. RSUs granted to date vest ratably over three or four years or cliff vest in one or four years. Awards are subject to employment for vesting and are not transferable other than upon death.

A summary of the Company’s RSU activity and related information for the thirteen weeks ended May 4, 2019 is as follows:

Number
of shares
Weighted
average
grant date
fair value
Non-vested balance at February 2, 2019
220,200
$
35.75
Granted
58,530
80.12
Forfeited
(799
)
75.90
Vested
(56,360
)
33.84
Non-vested balance at May 4, 2019
221,571
47.81

Stock-Based Compensation Expense

The compensation cost for stock options and RSUs which have been recorded within selling, general and administrative expenses related to the Company’s equity incentive plans was $2.2 million and $1.6 million for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively.

As of May 4, 2019, there was $22.4 million of total unrecognized compensation cost related to non-vested stock-based compensation arrangements. That cost is expected to be recognized over a weighted average period of 3.0 years.  Compensation costs related to awards are recognized using the straight-line method.

(9)
Subsequent Events

On May 22, 2019, the Company entered into an amended and restated credit agreement (the “Credit Agreement”). The Credit Agreement provides for a five-year $100.0 million revolving credit facility, which includes a $45.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans (the “New Revolving Credit Facility”). The loans under the New Revolving Credit Facility mature on May 22, 2024. In addition, the Company may, at any time and from time to time add term loan facilities or additional revolving commitments up to $150.0 million together with certain additional amounts pursuant to terms and conditions set out in the Credit Agreement.

On May 31, 2019, OBO Ventures, Inc. (“OBO”), a wholly owned subsidiary of the Company, entered into a sale-leaseback transaction with an unaffiliated third-party involving 12 former Toys “R” Us store locations which were acquired by OBO on August 29, 2018.  OBO received approximately $42 million in cash for the 12 locations.

ITEM 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial condition and results of our operations should be read together with the financial statements and related notes of Ollie’s Bargain Outlet Holdings, Inc. included in Item 1 of this Quarterly Report on Form 10-Q and with our audited financial statements and the related notes included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 29, 2019. As used in this Quarterly Report on Form 10-Q, except where the context otherwise requires or where otherwise indicated, the terms “Ollie’s,” the “Company,”  “we,” “our” and “us” refer to Ollie’s Bargain Outlet Holdings, Inc.

We operate on a fiscal calendar widely used by the retail industry that results in a fiscal year consisting of a 52- or 53-week period ending on the Saturday nearer to January 31 of the following year. References to “2019” refer to the 52-week period from February 3, 2019 to February 1, 2020. References to “2018” refer to the 52-week period from February 4, 2018 to February 2, 2019. The fiscal quarters or “first quarter” ended May 4, 2019 and May 5, 2018 refer to the 13 weeks from February 3, 2019 to May 4, 2019 and from February 4, 2018 to May 5, 2018, respectively.  Historical results are not necessarily indicative of the results to be expected for any future period and results for any interim period may not necessarily be indicative of the results that may be expected for a full year.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995.  Forward-looking statements can be identified by words such as “could,” “may,” “might,” “will,” “likely,” “anticipates,” “intends,” “plans,” “seeks,” “believes,” “estimates,” “expects,” “continues,” “projects” and similar references to future periods, prospects, financial performance and industry outlook. Forward-looking statements are based on our current expectations and assumptions regarding our business, the economy and other future conditions. Because forward-looking statements relate to the future, by their nature, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, our actual results may differ materially from those contemplated by the forward-looking statements. Important factors that could cause actual results to differ materially from those in the forward-looking statements include regional, national or global political, economic, business, competitive, market and regulatory conditions, including tax legislation, and the following: our failure to adequately procure and manage our inventory or anticipate consumer demand; changes in consumer confidence and spending; risks associated with intense competition; our failure to open new profitable stores, or successfully enter new markets, on a timely basis or at all; our failure to hire and retain key personnel and other qualified personnel; our inability to obtain favorable lease terms for our properties; the failure to timely acquire, develop, and open, the loss of, or disruption or interruption in the operations of, our centralized distribution centers; fluctuations in comparable store sales and results of operations, including on a quarterly basis; risks associated with our lack of operations in the growing online retail marketplace; risks associated with litigation and the outcomes thereof; our inability to successfully implement our marketing, advertising and promotional efforts; the seasonal nature of our business; risks associated with the timely and effective deployment and protection of computer  networks and other electronic systems; the risks associated with doing business with international manufacturers including, but not limited to, potential increases in tariffs on imported goods; changes in government regulations, procedures and requirements; and our ability to service indebtedness and to comply with our financial covenants together with the other factors set forth under “Item 1A - Risk Factors” contained herein and in our filings with the SEC, including our Annual Report on Form 10-K. Any forward-looking statement made by us in this Quarterly Report on Form 10-Q speaks only as of the date on which such statement is made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible for us to predict all of them. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise, except as may be required by law.  You are advised, however, to consult any further disclosures we make on related subjects in our public announcements and SEC filings.

Overview

Ollie’s is a highly differentiated and fast-growing, extreme value retailer of brand name merchandise at drastically reduced prices. Known for our assortment of products offered as “Good Stuff Cheap,” we offer customers a broad selection of brand name products, including housewares, food, books and stationery, bed and bath, flooring, toys and hardware.  Our differentiated go-to market strategy is characterized by a unique, fun and engaging treasure hunt shopping experience, compelling customer value proposition and witty, humorous in-store signage and advertising campaigns.

Our Growth Strategy

Since 1982, when we were founded, we have grown organically by backfilling in existing marketplaces and leveraging our brand awareness, marketing and infrastructure to expand into new markets in contiguous states.  In 2003, Mark Butler, our co-founder, assumed his current role as President and Chief Executive Officer.  Under Mr. Butler’s leadership, we expanded from 28 stores located in three states at the end of fiscal year 2003 to 324 stores located in 23 states as of May 4, 2019.

Our stores are currently supported by two distribution centers, one in York, PA and one in Commerce, GA, which we believe can support between 350 to 400 stores.  In 2018, we acquired a 58-acre parcel of land in Lancaster, TX to construct our third distribution center which will be approximately 615,000 square feet and will support 150 to 200 additional stores.  We have invested in our associates, infrastructure, distribution network and information systems to allow us to continue to rapidly grow our store footprint, including:


•
growing our merchant buying team to increase our access to brand name/closeout merchandise;


•
adding members to our senior management team;


•
expanding the capacity of our distribution centers to their current 1.6 million square feet plus an additional 615,000 square feet once the new distribution center is fully operational; and


•
investing in information technology, accounting, and warehouse management systems.

Our business model has produced consistent and predictable store growth over the past several years, during both strong and weaker economic cycles.  We plan to continue to enhance our competitive positioning and drive growth in sales and profitability by executing on the following strategies:


•
growing our store base;


•
increasing our offerings of great bargains; and


•
leveraging and expanding Ollie’s Army, our customer loyalty program.

We have a proven portable, flexible, and highly profitable store model that has produced consistent financial results and returns.  Our new store model targets a store size between 25,000 to 35,000 square feet and an average initial cash investment of approximately $1.0 million, which includes store fixtures and equipment, store-level and distribution center inventory (net of payables) and pre-opening expenses.  We target new store sales of approximately $3.9 million.

While we are focused on driving comparable store sales and managing our expenses, our revenue and profitability growth will primarily come from opening new stores.  The core elements of our business model are procuring great deals, offering extreme values to our customers and creating consistent, predictable store growth and margins.  In addition, our new stores generally open strong, immediately contributing to the growth in net sales and profitability of our business.  We plan to achieve continued net sales growth, including comparable stores sales, by adding additional stores to our store base and by continuing to provide quality merchandise at a value for our customers as we scale and gain more access to purchase directly from major manufacturers.  We also plan to leverage and expand our Ollie’s Army database marketing strategies.  In addition, we plan to continue to manage our selling, general and administrative expenses (“SG&A”) by continuing to make process improvements and by maintaining our standard policy of reviewing our operating costs.

Our ability to grow and our results of operations may be impacted by additional factors and uncertainties, such as consumer spending habits, which are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages and consumer trends and preferences, which fluctuate depending on the environment. The potential consolidation of our competitors or other changes in our competitive landscape could also impact our results of operations or our ability to grow, even though we compete with a broad range of retailers.

Our key competitive advantage is our direct buying relationships with many major manufacturers, wholesalers, distributors, brokers and retailers for our brand name and closeout products and unbranded goods.  We also augment our product mix with private label brands.  As we continue to grow, we believe our increased scale will provide us with even greater access to brand name and closeout products as major manufacturers seek a single buyer to acquire an entire deal.

How We Assess the Performance of Our Business and Key Line Items

We consider a variety of financial and operating measures in assessing the performance of our business.  The key measures we use are number of new stores, net sales, comparable store sales, gross profit and gross margin, SG&A, pre-opening expenses, operating income, EBITDA and Adjusted EBITDA.

Number of New Stores

The number of new stores reflects the number of stores opened during a particular reporting period.  Before we open new stores, we incur pre-opening expenses described below under “Pre-Opening Expenses” and we make an initial investment in inventory.  We also make initial capital investments in fixtures and equipment, which we amortize over time.

We opened 21 new stores during the thirteen weeks ended May 4, 2019.  We expect new store growth to be the primary driver of our sales growth.  Our initial lease terms are approximately seven years with options to renew for three to five successive five-year periods.  Our portable and predictable real estate model focuses on backfilling existing markets and entering new markets in contiguous states. Our new stores often open with higher sales levels as a result of greater advertising and promotional spend in connection with grand opening events, but decline shortly thereafter to our new store model levels.

Net Sales

Ollie’s recognizes retail sales in its stores when merchandise is sold and the customer takes possession of merchandise.  Also included in net sales is revenue allocated to certain redeemed discounts earned via the Ollie’s Army loyalty program and gift card breakage.  Net sales are presented net of returns and sales tax.  Net sales consist of sales from comparable stores and non-comparable stores, described below under “Comparable Store Sales.”  Growth of our net sales is primarily driven by expansion of our store base in existing and new markets.  As we continue to grow, we believe we will have greater access to brand name and closeout merchandise and an increased deal selection, resulting in more potential offerings for our customers.  Net sales are impacted by product mix, merchandise mix and availability, as well as promotional activities and the spending habits of our customers. Our broad selection of offerings across diverse product categories supports growth in net sales by attracting new customers, which results in higher spending levels and frequency of shopping visits from our customers, including Ollie’s Army members.

The spending habits of our customers are subject to macroeconomic conditions and changes in discretionary income.  Our customers’ discretionary income is primarily impacted by gas prices, wages, and consumer trends and preferences, which fluctuate depending on the environment.  However, because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles. These cycles correspond with declines in general consumer spending habits and we benefit from periods of increased consumer spending.

Comparable Store Sales

Comparable store sales measure performance of a store during the current reporting period against the performance of the same store in the corresponding period of the previous year.  Comparable store sales consists of net sales from our stores beginning on the first day of the sixteenth full fiscal month following the store’s opening, which is when we believe comparability is achieved.  Comparable store sales are impacted by the same factors that impact net sales.

We define comparable stores to be stores that:


•
have been remodeled while remaining open;


•
are closed for five or fewer days in any fiscal month;


•
are closed temporarily and relocated within their respective trade areas; and


•
have expanded, but are not significantly different in size, within their current locations.

Non-comparable store sales consist of new store sales and sales for stores not open for a full 15 months.  Stores which are closed temporarily, but for more than five days in any fiscal month, are included in non-comparable store sales beginning in the fiscal month in which the temporary closure begins until the first full month of operation once the store re-opens, at which time they are included in comparable store sales.

Opening new stores is the primary component of our growth strategy and as we continue to execute on our growth strategy, we expect a significant portion of our sales growth will be attributable to non-comparable store sales.  Accordingly, comparable store sales are only one measure we use to assess the success of our growth strategy.

Gross Profit and Gross Margin

Gross profit is equal to our net sales less our cost of sales.  Cost of sales includes merchandise costs, inventory markdowns, shrinkage and transportation, distribution and warehousing costs, including depreciation. Gross margin is gross profit as a percentage of our net sales. Gross margin is a measure used by management to indicate whether we are selling merchandise at an appropriate gross profit.

In addition, our gross profit margin is impacted by product mix, as some products generally provide higher gross margins, by our merchandise mix and availability, and by our merchandise cost, which can vary.

Our gross profit is variable in nature and generally follows changes in net sales.  We regularly analyze the components of gross profit, as well as gross margin.  Specifically, our product margin and merchandise mix is reviewed by our merchant team and senior management, ensuring strict adherence to internal margin goals.  Our disciplined buying approach has produced consistent gross margins and we believe helps to mitigate adverse impacts on gross profit and results of operation.

The components of our cost of sales may not be comparable to the components of cost of sales or similar measures of our competitors and other retailers.  As a result, our gross profit and gross margin may not be comparable to similar data made available by our competitors and other retailers.

Selling, General and Administrative Expenses

SG&A are comprised of payroll and benefits for store, field support and support center associates.  SG&A also include marketing and advertising, occupancy, utilities, supplies, credit card processing fees, insurance and professional services. The components of our SG&A remain relatively consistent per store and for each new store opening. The components of our SG&A may not be comparable to the components of similar measures of other retailers.  Consolidated SG&A generally increase as we grow our store base and as our net sales increase. A significant portion of our expenses is primarily fixed in nature, and we expect to continue to maintain strict discipline while carefully monitoring SG&A as a percentage of net sales.  We expect that our SG&A will continue to increase in future periods with future growth.

Pre-Opening Expenses

Pre-opening expenses consist of expenses of opening new stores and distribution centers.  For new stores, pre-opening expenses include grand opening advertising costs, payroll expenses, travel expenses, employee training costs, rent expenses and store setup costs, as well as store closing costs.  Pre-opening expenses for new stores are expensed as they are incurred, which is typically within 30 to 45 days of opening a new store. For distribution centers, pre-opening expenses primarily include inventory transportation costs, employee travel expenses and occupancy costs.

Operating Income

Operating income is gross profit less SG&A, depreciation and amortization and pre-opening expenses.  Operating income excludes interest expense, net, and income tax expense.  We use operating income as an indicator of the productivity of our business and our ability to manage expenses.

EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA are key metrics used by management and our Board to assess our financial performance.  EBITDA and Adjusted EBITDA are also frequently used by analysts, investors and other interested parties to evaluate companies in our industry.  We use Adjusted EBITDA to supplement GAAP measures of performance to evaluate the effectiveness of our business strategies, to make budgeting decisions, to evaluate our performance in connection with compensation decisions and to compare our performance against that of other peer companies using similar measures.  Management believes it is useful to investors and analysts to evaluate these non-GAAP measures on the same basis as management uses to evaluate the Company’s operating results.  We believe that excluding items from operating income, net income and net income per diluted share that may not be indicative of, or are unrelated to, our core operating results, and that may vary in frequency or magnitude, enhances the comparability of our results and provides a better baseline for analyzing trends in our business.

We define EBITDA as net income before net interest expense, loss on extinguishment of debt, depreciation and amortization expenses and income taxes.  Adjusted EBITDA represents EBITDA as further adjusted for non-cash stock-based compensation expense, gain from insurance settlement and non-cash purchase accounting items.  EBITDA and Adjusted EBITDA are non-GAAP measures and may not be comparable to similar measures reported by other companies.  EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. In the future we may incur expenses or charges such as those added back to calculate Adjusted EBITDA. Our presentation of Adjusted EBITDA should not be construed as an inference that our future results will be unaffected by these items. For further discussion of EBITDA and Adjusted EBITDA and for reconciliations of EBITDA and Adjusted EBITDA to net income, the most directly comparable GAAP measure, see “Results of Operations.”

Factors Affecting the Comparability of our Results of Operations

Our results over the past two years have been affected by the following events, which must be understood in order to assess the comparability of our period-to-period financial performance and condition.

Historical Results

Historical results are not necessarily indicative of the results to be expected for any future period.

Financing Transactions

Our credit facilities consisted of a $200.0 million term loan (“Term Loan Facility”) and $100.0 million revolving credit facility (“Revolving Credit Facility,” and together with the Term Loan, the “Credit Facilities”) which includes a $25.0 million sub-facility for letters of credit and a $25.0 million sub-facility for swingline loans.

On May 22, 2019, we amended and restated our Revolving Credit Facility to effect several amendments thereto and extend the maturity thereunder to May 22, 2024. For further information, see Note 9 under “Notes to Unaudited Condensed Consolidated Financial Statements”.

The Company made voluntary prepayments under the Term Loan Facility totaling $48.8 million during 2018, paying the balance in full.

Store Openings

We opened 21 and eight new stores in the thirteen weeks ended May 4, 2019 and May 5, 2018 respectively. In connection with these store openings, we incurred pre-opening expenses of $5.2 million and $1.8 million for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively.

Seasonality

Our business is seasonal in nature and demand is generally the highest in our fourth fiscal quarter due to the holiday sales season.  To prepare for the holiday sales season, we must order and keep in stock more merchandise than we carry during other times of the year and generally engage in additional marketing efforts.  We expect inventory levels, along with accounts payable and accrued expenses, to reach their highest levels in our third and fourth fiscal quarters in anticipation of increased net sales during the holiday sales season.  As a result of this seasonality, and generally because of variation in consumer spending habits, we experience fluctuations in net sales and working capital requirements during the year.  Because we offer a broad selection of merchandise at extreme values, we believe we are less impacted than other retailers by economic cycles which correspond with declines in general consumer spending habits and we believe we still benefit from periods of increased consumer spending.

Results of Operations

The following tables summarize key components of our results of operations for the periods indicated, both in dollars and as a percentage of our net sales.

We derived the condensed consolidated statements of income for the thirteen weeks ended May 4, 2019 and May 5, 2018 from our unaudited condensed consolidated financial statements and related notes.  Our historical results are not necessarily indicative of the results that may be expected in the future.

Thirteen weeks ended
May 4,
2019
May 5,
2018
( dollars in thousands)
Condensed consolidated statements of income data :
Net sales
$
324,854
$
275,739
Cost of sales
192,120
162,863
Gross profit
132,734
112,876
Selling, general and administrative expenses
83,332
72,364
Depreciation and amortization expenses
3,409
2,763
Pre-opening expenses
5,209
1,764
Operating income
40,784
35,985
Interest (income) expense, net
(145
)
538
Loss on extinguishment of debt
-
100
Income before income taxes
40,929
35,347
Income tax expense
2,212
4,893
Net income
$
38,717
$
30,454
Percentage of net sales (1) :
Net sales
100.0
%
100.0
%
Cost of sales
59.1
59.1
Gross profit
40.9
40.9
Selling, general and administrative expenses
25.7
26.2
Depreciation and amortization expenses
1.0
1.0
Pre-opening expenses
1.6
0.6
Operating income
12.6
13.1
Interest (income) expense, net
—
0.2
Loss on extinguishment of debt
—
—
Income before income taxes
12.6
12.8
Income tax expense
0.7
1.8
Net income
11.9
%
11.0
%
Select operating data:
New store openings
21
8
Number of stores open at end of period
324
276
Average net sales per store (2)
$
1,032
$
1,011
Comparable stores sales change
0.8
%
1.9
%


(1)
Components may not add to totals due to rounding.

(2)
Average net sales per store represents the weighted average of total net sales divided by the number of stores open, in each case at the end of each week in each fiscal period .

The following table provides a reconciliation of our net income to Adjusted EBITDA for the periods presented:

Thirteen weeks ended
May 4,
2019
May 5,
2018
( dollars in thousands)
Net income
$
38,717
$
30,454
Interest (income) expense, net
(145
)
538
Loss on extinguishment of debt
-
100
Depreciation and amortization expenses (1)
4,199
3,393
Income tax expense
2,212
4,893
EBITDA
44,983
39,378
Gain from insurance settlement
(565
)
-
Non-cash stock-based compensation expense
2,193
1,600
Non-cash purchase accounting items (2)
-
(1
)
Adjusted EBITDA
$
46,611
$
40,977


(1)
Includes depreciation and amortization relating to our distribution centers, which is included within cost of sales on our condensed consolidated statements of income and amortization of acquisition-related favorable lease adjustments which is included within SG&A on our condensed consolidated statements of income.


(2)
Includes purchase accounting impact from unfavorable lease liabilities related to a prior acquisition.

First Quarter 2019 Compared to First Quarter 2018

Net Sales

Net sales increased to $324.9 million in the thirteen weeks ended May 4, 2019 from $275.7 million in the thirteen weeks ended May 5, 2018, an increase of $49.1 million, or 17.8%.  The increase was the result of a comparable store sales increase of $2.1 million, or 0.8%, and a non-comparable store sales increase of $47.0 million.  The increase in non-comparable store sales was driven by sales from new stores that have not been open for a full 15 months.

Comparable store sales increased 0.8% for the thirteen weeks ended May 4, 2019 compared to a 1.9% increase for the thirteen weeks ended May 5, 2018.  The increase in comparable store sales for the thirteen weeks ended May 4, 2019 was driven by strong sales in our floor coverings, health and beauty aids, and electronics departments offset by decreases in the food and stationery departments.

Cost of Sales

Cost of sales increased to $192.1 million in the thirteen weeks ended May 4, 2019 from $162.9 million in the thirteen weeks ended May 5, 2018, an increase of $29.3 million, or 18.0%.  The increase in cost of sales was primarily the result of increased net sales.

Gross Profit and Gross Margin

Gross profit increased to $132.7 million in the thirteen weeks ended May 4, 2019 from $112.9 million in the thirteen weeks ended May 5, 2018, an increase of $19.9 million, or 17.6%. Gross margin was consistent for the thirteen weeks ended May 4, 2019 and the thirteen weeks ended May 5, 2018 at 40.9% as both merchandise margin and supply chain costs as a percentage of net sales were even compared to the prior year.

Selling, General and Administrative Expenses

SG&A increased to $83.3 million in the thirteen weeks ended May 4, 2019 from $72.4 million in the thirteen weeks ended May 5, 2018, an increase of $11.0 million, or 15.2%.  Included in SG&A in the thirteen weeks ended May 4, 2019 is $0.6 million of income related to a gain from an insurance settlement.  Excluding this gain, SG&A increased 15.9% to $83.9 million in the thirteen weeks ended May 4, 2019.  The increase in SG&A was primarily driven by increased selling expenses related to new store growth and increased sales volume.  The increased selling expenses consisted primarily of store payroll and benefits, store occupancy costs and other store related expenses.

Pre-Opening Expenses

Pre-opening expenses increased to $5.2 million in the thirteen weeks ended May 4, 2019 from $1.8 million in the thirteen weeks ended May 5, 2018, an increase of $3.4 million, or 195.3%. The increase in pre-opening expenses during the thirteen weeks ended May 4, 2019 was due to the timing and number of new store openings.

Interest (Income) Expense, Net

Net interest income was $0.1 million in the thirteen weeks ended May 4, 2019 compared to net interest expense of $0.5 million in the thirteen weeks ended May 5, 2018, a net decrease in expense of $0.7 million.  The Term Loan Facility was paid in full during 2018, decreasing our average outstanding debt balance during the thirteen weeks ended May 4, 2019, which decreased our interest expense.

Income Tax Expense

Income tax expense for the thirteen weeks ended May 4, 2019 was $2.2 million compared to $4.9 million for the thirteen weeks ended May 5, 2018.  The effective tax rates for the thirteen weeks ended May 4, 2019 and May 5, 2018 were 5.4% and 13.8%, respectively.  The reduced effective tax rate in the thirteen weeks ended May 4, 2019 was primarily the result of an increase in excess tax benefits related to stock-based compensation.  These discrete tax benefits totaled $8.1 million and $3.9 million for the thirteen weeks ended May 4, 2019 and May 5, 2018, respectively.

Net Income

As a result of the foregoing, net income increased to $38.7 million in the thirteen weeks ended May 4, 2019 from $30.5 million in the thirteen weeks ended May 5, 2018, an increase of $8.3 million or 27.1%.

Adjusted EBITDA

Adjusted EBITDA increased to $46.6 million in the thirteen weeks ended May 4, 2019 from $41.0 million in the thirteen weeks ended May 5, 2018, an increase of $5.6 million, or 13.7%, largely driven by increased gross profit dollars due to the increased sales volume.  In addition, as a result of the sales increase in the period, SG&A as a percentage of net sales, excluding the gain from the insurance settlement, decreased by 40 basis points, all resulting in increased adjusted EBITDA compared to the same period last year.

Liquidity and Capital Resources

Overview

Our primary sources of liquidity are net cash provided by operating activities and borrowings under our Revolving Credit Facility.  Our primary cash needs are for capital expenditures and working capital.  As of May 4, 2019, we had $98.1 million of available borrowings under our Revolving Credit Facility and $58.5 million of cash and cash equivalents on hand. On May 22, 2019, we amended and restated our Revolving Credit Facility to effect several amendments thereto and extend the maturity thereunder to May 22, 2024. For further information, see Note 9 under “Notes to Unaudited Condensed Consolidated Financial Statements”.

Our capital expenditures are primarily related to new store openings, store resets, which consist of improvements to stores as they are needed, expenditures related to our distribution centers, and infrastructure-related investments, including investments related to upgrading and maintaining our information technology systems.  For the thirteen weeks ended May 4, 2019, we spent $20.1 million for capital expenditures compared to $4.7 million for the thirteen weeks ended May 5, 2018. We expect to fund capital expenditures from net cash provided by operating activities. We opened 21 stores during the thirteen weeks ended May 4, 2019 and expect to open between 42 and 44 stores during 2019. We also expect to invest in our distribution centers, including the 58-acre parcel of land in Lancaster, TX acquired in 2018 for the construction of our third distribution center. In addition, we expect to invest in store resets and general corporate capital expenditures, including information technology, in 2019.

Historically, we have funded our capital expenditures and working capital requirements during the fiscal year with cash on hand and borrowings under our Revolving Credit Facility.  When we have used our Revolving Credit Facility, the amount of indebtedness outstanding under it has tended to be the highest in the beginning of our fourth fiscal quarter.

Our primary working capital requirements are for the purchase of inventory, payroll, rent, other store operating costs, distribution costs and general and administrative costs.  Our working capital requirements fluctuate during the year, rising in our third fiscal quarter as we increase quantities of inventory in anticipation of our peak holiday sales season in our fourth fiscal quarter.  Fluctuations in working capital are also driven by the timing of new store openings.

Based on our new store growth plans, we believe our cash position, net cash provided by operating activities and availability under our Revolving Credit Facility will be adequate to finance our planned capital expenditures, working capital requirements and debt service over the next 12 months.  If cash provided by operating activities and borrowings under our Revolving Credit Facility are not sufficient or available to meet our capital requirements, we will then be required to obtain additional equity or debt financing in the future.  There can be no assurance equity or debt financing will be available to us when needed or, if available, the terms will be satisfactory to us and not dilutive to our then-current stockholders.

Summary of Cash Flows

A summary of our cash flows from operating, investing and financing activities is presented in the following table:

Thirteen weeks ended
May 4,
2019
May 5,
2018
(in thousands)
Net cash provided by operating activities
$
21,976
$
15,348
Net cash used in investing activities
(20,107
)
(4,708
)
Net cash provided by (used in) financing activities
4,701
(22,260
)
Net increase (decrease) in cash and cash equivalents
$
6,570
$
(11,620
)

Cash Provided by Operating Activities

Net cash provided by operating activities for the thirteen weeks ended May 4, 2019 and May 5, 2018 was $22.0 million and $15.3 million, respectively.  The increase in net cash provided by operating activities for the thirteen weeks ended May 4, 2019 was primarily due to increases in net income due to new store openings.

Cash Used in Investing Activities

Net cash used in investing activities for the thirteen weeks ended May 4, 2019 and May 5, 2018 was $20.1 million and $4.7 million, respectively.  The increase in cash used in investing activities relates to the continued construction of our third distribution center, which totaled approximately $10.1 million, and the timing of capital expenditures for our new store locations.

Cash Provided by (Used In) Financing Activities

Net cash provided by financing activities was $4.7 million in the thirteen weeks ended May 4, 2019 compared to net cash used in financing activities of $22.3 million in the thirteen weeks ended May 5, 2018.  The net change in financing activities is primarily due to the pay off of the term loan in 2018.

Contractual Obligations

We enter into long-term contractual obligations and commitments in the normal course of business, primarily operating leases. Except as set forth below, there have been no material changes to our contractual obligations as disclosed in our Annual Report on Form 10-K, other than those which occur in the ordinary course of business.

During the thirteen weeks ended May 4, 2019, eight new store leases commenced.  The fully executed leases have initial terms of approximately seven years with options to renew for three to five successive five-year periods which have future minimum lease payments which total approximately $12.5 million.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. There have been no significant changes in the significant accounting policies and estimates.

Recently Issued Accounting Pronouncements

Recently issued accounting pronouncements are discussed in Note 1(f) to the condensed consolidated financial statements.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are subject to interest rate risk in connection with borrowings under our credit facilities, which bear interest at variable rates. As of May 4, 2019, we had no outstanding variable rate debt under our Revolving Credit Facility and no outstanding variable rate debt under our Term Loan Facility, which was paid in full in 2018.

As of May 4, 2019, there were no other material changes in the market risks described in the “Quantitative and Qualitative Disclosure of Market Risks” section of our Annual Report on Form 10-K filed with the SEC on March 29, 2019.

Impact of Inflation

Our results of operations and financial condition are presented based on historical cost. While it is difficult to accurately measure the impact of inflation due to the imprecise nature of the estimates required, we believe the effects of inflation, if any, on our historical results of operations and financial condition have been immaterial. We cannot be assured that our results of operations and financial condition will not be materially impacted by inflation in the future.

ITEM 4.
CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q pursuant to Rule 13a-15(b) of the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q are effective at a reasonable assurance level in ensuring that information required to be disclosed in our Exchange Act reports is: (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and all fraud. While our disclosure controls and procedures are designed to provide reasonable assurance of their effectiveness, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control over Financial Reporting

We adopted ASU 2016-02, Leases, as of February 3, 2019. As a result, we implemented controls related to the adoption and the related financial statement reporting. There were no other changes to our internal control over financial reporting during the thirteen weeks ended May 4, 2019 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS

From time to time we may be involved in claims and legal actions that arise in the ordinary course of our business. We cannot predict the outcome of any litigation or suit to which we are a party.  However, we do not believe that an unfavorable decision of any of the current claims or legal actions against us, individually or in the aggregate, will have a material adverse effect on our financial position, results of operations, liquidity or capital resources.

ITEM 1A.
RISK FACTORS

See Item 1A in our Annual Report on Form 10-K for the year ended February 2, 2019 for a detailed description of risk factors affecting the Company.  There have been no significant changes from the risk factors previously disclosed in those filings.

ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4.
MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.
OTHER INFORMATION

None.

ITEM 6.
EXHIBITS

Exhibit No.
Description of Exhibits
Amended and Restated Credit Agreement, dated May 22, 2019, among Bargain Parent, Inc., OBO Ventures, Inc. and certain subsidiaries, as borrowers, Manufacturers and Traders Trust Company, as Administrative Agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report filed on Form 8-K by the Company on May 24, 2019 (No. 001-37501)).
Amended and Restated Guarantee and Collateral Agreement, dated May 22, 2019, Bargain Parent, Inc., Ollie’s Holdings, Inc., OBO Ventures, Inc. and certain subsidiaries, in favor of Manufacturers and Trading Trust Company, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Current Report filed on Form 8-K by the Company on May 24, 2019 (No. 001-37501)).
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
**101.INS
XBRL Instance Document.
**101.SCH
XBRL Taxonomy Extension Schema Document.
**101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
**101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
**101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
**101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document.

* Filed herewith.
† Previously filed .

** Submitted electronically with this Report.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

OLLIE’S BARGAIN OUTLET HOLDINGS, INC.
Date: June 10, 2019
/s/ Jay Stasz
Jay Stasz
Senior Vice President and
Chief Financial Officer
(Principal Financial and Accounting Officer)


27
TABLE OF CONTENTS
Item 1 Condensed Consolidated Financial Statements (unaudited)Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits

Exhibits

10.1 Amended and Restated Credit Agreement, dated May 22, 2019, among Bargain Parent, Inc., OBO Ventures, Inc. and certain subsidiaries, as borrowers, Manufacturers and Traders Trust Company, as Administrative Agent, and certain lenders party thereto (incorporated by reference to Exhibit 10.1 to the Current Report filed on Form 8-K by the Company on May 24, 2019 (No. 001-37501)). 10.2 Amended and Restated Guarantee and Collateral Agreement, dated May 22, 2019, Bargain Parent, Inc., Ollies Holdings, Inc., OBO Ventures, Inc. and certain subsidiaries, in favor of Manufacturers and Trading Trust Company, as Administrative Agent (incorporated by reference to Exhibit 10.2 to the Current Report filed on Form 8-K by the Company on May 24, 2019 (No. 001-37501)). *31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.