Ollie's Bargain Outlet - Q1 2020
June 6, 2019
Transcript
Operator (participant)
Good afternoon, and welcome to Ollie's Bargain Outlet Conference Call to discuss financial results for the first quarter of fiscal 2019. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. Please be advised that reproduction of this call, in whole or in part, is not permitted without written authorization from Ollie's. As a reminder, this call is being recorded. On the call today from management are Mark Butler, Chairman, President, and Chief Executive Officer, John Swygert, Executive Vice President and Chief Operating Officer, and Jay Stasz, Senior Vice President and Chief Financial Officer. I will turn the call over to Jean Fontana, Investor Relations, to get started. Please go ahead, ma'am.
Jean Fontana (Head of Investor Relations)
Thank you. Good afternoon, everyone. A press release covering the company's first quarter 2019 financial results was issued this afternoon, and a copy of that press release can be found in the Investor Relations section of the company's website. I want to remind everyone that management's remarks on this call may contain forward-looking statements, including, but not limited to, predictions, expectations, or estimates, and that actual results could differ materially from those mentioned on today's call. Any such items, including our outlook for fiscal 2019 and future performance, should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on these forward-looking statements, which speak only as of today, and we undertake no obligation to update or revise them for any new information or future events.
Factors that may affect future results may not be in our control and are discussed in our SEC filings. We encourage you to review these filings, including our annual report on Form 10-K and quarterly reports on Form 10-Q, as well as our earnings release issued earlier today for a more detailed description of these factors. We will be referring to certain non-GAAP financial measures on today's call, such as adjusted EBITDA, adjusted net income, and adjusted net income per diluted share, that we believe may be important to investors to assess our operating performance. Reconciliations of the most closely comparable GAAP financial measures to these non-GAAP financial measures are included in our earnings release. With that said, I will turn the call over to Mark.
Mark Butler (CEO)
Thanks, Jean, and hello, everyone. Thanks for joining our call today. We're off to another strong start this year, with first quarter results exceeding our top and bottom line expectations. Strong deal flow, outstanding new performance, and comparable store sales growth drove an 18% increase in our top line. This was our 20th consecutive quarter of positive comps, with a 0.8% comp store sales increase on top of a two-year stack increase of 3.6%. We saw broad-based strength across our merchandise categories, with over half of our departments comping positive. Our best-performing categories included floor coverings, health and beauty aids, electronics, and toys. Tough weather in many of our markets impacted our seasonal business, but we were able to deliver better than top-line sales as our new stores crushed it.
As always, we successfully controlled our business and delivered strong results and another earnings beat. As we look to the balance of 2019, we remain focused on the execution of our key strategies, offering amazing deals, growing our store base, and leveraging and expanding Ollie's Army. Our proven track record of offering good stuff cheap has driven our success for now almost 37 years. Our amazing deals clearly resonate with our bargain-seeking customers, and I'll tell you, we continue to get incredible deals from new and existing vendors. Our ability to capitalize on the disruption in the retail landscape has never been better, as we continue to leverage our growing scale and key vendor relationships. The bigger we get, the greater the opportunities for us to land even more great deals to support even more stores. This will absolutely be the fuel for our continued growth.
New stores once again performed above our expectations in the quarter, further demonstrating the strength of our model. We've been busy. So far this year, we've opened 24 stores, including 12 former Toys 'R' Us locations. We expect the new stores to continue to be a significant driver of our growth as we see great opportunities to expand the Ollie's footprint with successful new stores in existing and new markets. We're on target to open 42-44 stores in 2019, in line with our long-term growth algorithm. We're planning to enter two new states, Oklahoma and Massachusetts, and with these additions, we'll have reached the halfway mark to 50 states. As we move toward our goal of tripling our store base to more than 950 stores nationwide, we're investing in our infrastructure.
We've made significant investments in our distribution network, including the construction of our third DC. We're on budget, we're on schedule, and expect to be operational during the first quarter of 2020. With the new DC, we'll have three distribution centers with total capacity to serve over 500 stores. We are continuing to grow our loyal base of Ollie's Army members as we expand our retail presence. The Bargain Battalion is now over 9.4 million active members, nearly an 11% increase year over year. Our 2018 program enhancements, the Ollie's Army Ranks and the mobile app, were designed to both attract new Army members and to keep us top of mind with current members.
Our goal remains straightforward with every initiative: reward the tremendous loyalty of the Army and keep them coming back. Our philosophy of buying cheap and selling cheap, coupled with tight expense control and profitable new store openings, has driven our business for almost 37 years and will continue to do so. This is the model that got us here, and we're sticking with it. We've grown our organization over 8,000 team members who are working harder than ever. It's their combined experience and commitment that makes Ollie's successful, and I'd like to thank everyone in the stores, the distribution centers, and the store support center for their hard work and their dedication. So to wrap it up, we are very pleased with our strong start to 2019, and I feel good about the business.
Our long-term algorithm, including our 1%-2% annual comp guidance, has not changed. Stick with me. Our new stores are stronger than ever, and we're very pleased with the overall trends and the opportunities in the business. We're confident in our ability to continue driving sales and profitable growth this year and into the future. I'd like to thank you for your support of Ollie's. I'll now turn the call over to Jay to take you through our financial results and the 2019 outlook in more detail.
Jay Stasz (CFO)
Thanks, Mark, and good afternoon, everyone. We're very pleased to have delivered another great quarter with strong top line growth, effective management of gross margin, and tightly controlled expenses, resulting in adjusted EPS of $0.46 per diluted share, $0.02 ahead of the consensus estimate. Net sales increased 17.8% to $324.9 million. Comparable store sales increased 0.8%, resulting in our 20th consecutive quarter of positive comps. The increase in comp store sales was driven by an increase in average basket, partially offset by a decrease in transactions. As Mark mentioned, we did see some weather-related headwinds throughout the quarter, but by managing elements within our control, we delivered strong results.
During the quarter, we opened 21 new stores, ending with 324 stores in 23 states, an increase in store count of 17.4% year over year. Our new stores continue to perform above our expectations across both new and existing markets, and we are very pleased with the productivity of our entire store base. Gross profit for the quarter increased 17.6% to $132.7 million, and gross margin was consistent with the prior year at 40.9%, as both merchandise margin and supply chain costs as a percentage of net sales were flat to last year. SG&A expenses increased 15.2% to $83.3 million, primarily the result of additional selling expenses from our new stores and increased sales volume in our existing store base.
SG&A, as reported, included a gain of $565,000 from an insurance settlement. Excluding this gain, we leveraged SG&A expenses by 40 basis points to 25.8% of net sales. Pre-opening expenses increased to $5.2 million and deleveraged 100 basis points due to the number and timing of new store openings year over year. We opened 21 stores in the first quarter this year compared to 8 stores last year. Operating income increased 13.3% to $40.8 million. Excluding the gain from the insurance settlement, adjusted operating income increased 11.8% to $40.2 million, and adjusted operating margin decreased 70 basis points to 12.4% as a result of the deleveraging of pre-opening expenses.
Net income increased 27.1% to $38.7 million, and net income per diluted share increased 28.3% to $0.59. Included in the $0.59 is a benefit of $0.12 from tax benefits related to stock-based compensation. Adjusted net income, which excludes these benefits and the after-tax gain from the insurance settlement in the first quarter this year, and the loss on extinguishment of debt in the first quarter last year, increased 13.5% to $30.2 million, and adjusted net income per diluted share increased 12.2% to $0.46. Adjusted EBITDA increased 13.7% to $46.6 million. At the end of the quarter, we had $58.5 million in cash and no outstanding borrowings under our revolving credit facility.
As previously announced, we recently amended our credit agreement, providing for a 5-year, $100 million revolving credit facility, and subject to certain conditions, an additional $150 million of incremental term loan or revolver commitments for a total borrowing capacity of $250 million. We also recently completed a sale-leaseback transaction, pursuant to which the 12 former Toys "R" Us store locations that we acquired last year were sold for approximately $42 million. Inventory at the end of the quarter increased 19.2% over the prior year, primarily due to new store growth and the timing of deal flow. Capital expenditures increased to $20.1 million in the quarter, compared to $4.7 million in the prior year period, due to investments in our third distribution center, new stores, and maintenance capital.
Turning to our outlook, we are raising our full year guidance to reflect first quarter results. While we believe the first quarter was strong, we remain prudent in how we plan the business, given that we operate in a deal-driven environment and we are lapping a very strong year. As we said last quarter, our plans are in line with our long-term annual targets of mid-teen unit growth and a 1%-2% comp store sales increase, which drives adjusted net income growth of approximately 20%.
We now expect total net sales of $1.44 billion-$1.453 billion, an increase of 16.5% at the midpoint of the range, comparable store sales growth of 1%-2%, the opening of 42-44 new stores with no planned relocations or closures, adjusted operating income of $190 million-$194 million, adjusted net income of $142 million-$145 million, and adjusted net income per diluted share of $2.13-$2.17, both of which exclude the tax benefits related to stock-based compensation and the after-tax gain from the insurance settlement. A couple of additional points to help you in your modeling.
While there is no change to our full-year gross margin forecast of 40.1%, we want to clarify our quarterly guidance. We anticipate an approximate 20-30 basis point decrease in 2Q, compared to the prior year, which we will pick up in the back half of the year. The cadence of our new store openings remains approximately 60% in the front half and 40% in the back half. $5.2 million of our expected $11 million in pre-opening expenses were incurred in Q1, resulting in approximately $5.8 million to be spent during the remainder of the year. We expect to incur approximately 35% of the remaining pre-opening expenses in Q2, 45% in Q3, and 20% in Q4.
Our CapEx outlook remains the same at $75 million-$80 million, driven by the construction and build-out of our new distribution center in Texas and investments in new and existing stores. I'll now turn the call back over to the operator to start the Q&A session. Operator?
Operator (participant)
Certainly. Ladies and gentlemen, if you have a question at this time, please press star, then one on your touch-tone telephone. If your question has been answered and you'd like to remove yourself from the queue, please press the pound key. Our first question comes from the line of Matthew Boss from J.P. Morgan. Your question, please.
Matthew Boss (Analyst)
Mark, maybe by category, what exceeded versus missed your internal plan in the first quarter? Any comments on May, and just your confidence in comping the tougher comparisons on tap for the remainder of the year?
Mark Butler (CEO)
Yeah, well, Matt, the top three department performers were floor covering.
Jay Stasz (CFO)
HBA.
Mark Butler (CEO)
HBA, electronics, and toys. And toys, so that everybody doesn't get wound up. Toys just isn't a very, very big, big mover for us in the quarter, but we did very well compared to last year. So, you know, we really have been doing very well on floor covering. We've got a lot of great deals and a lot of great product. So, you know, I would say that is the most exciting thing that we have going on right now. As far as May, obviously, we all know we can't speak to... I feel good about where we are. The weather has not been favorable. I'm not. We're not the only retailer in America that's saying that.
But, you know, anything that we feel is gonna be corrected with a little bit of warm weather, and we, you know, we're locked and we're loaded in warm weather and seasonal products, which are performing well. Air conditioners with a warm night are really gonna kick in. We got plenty of them. We got great buys. We've been buying them all year long, so I'm excited about that. And our lawn and garden and our patio, we're locked and loaded. And, you know, any kind of real pop that we were expecting in Q1, you know, we're expecting to come in Q2, much like we discussed putting Q1 and Q2 together when we were at your Retail Round-Up.
Matthew Boss (Analyst)
Perfect. And then just to follow up on the stores. So new store productivity of almost 100% remains pretty far above your target model. I guess, what are you seeing in your most recent openings? And can you just talk to the interplay between new stores and same store sales, given you're raising revenues today despite comps at the low end for the quarter?
Jay Stasz (CFO)
Sure, Matt, this is Jay, and I can talk to the new store productivity. And you're right, I mean, the stores are performing extremely well, extremely strong, this class as well as the, you know, prior classes. So we are. We are seeing, and we're planned right now on an annual basis above the 100%, and part of that has to do with the cadence of our stores being front-loaded this year versus last year. But like we've talked about, those new stores and several classes have been very strong, and I think from a comp standpoint, we are seeing some headwinds as those stores enter the comp base. It's something that we've mentioned a little bit. We're seeing it from a reverse waterfall standpoint as well as a cannibalization standpoint.
Mark Butler (CEO)
Yeah, I think, Matt, from our perspective as well, obviously, the new store is performing very strong, as Jay said. But the reverse waterfall impact, and we're still able to deliver the positive comps in 20 quarters in a row. So we're very excited about being able to grow as rapidly as we're growing and continue to deliver these comp store sales.
Matthew Boss (Analyst)
That's great. Best of luck, guys.
Mark Butler (CEO)
Thanks, Matt.
Jay Stasz (CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Brad Thomas from KeyBanc Capital Markets. Your question, please.
Bradley Thomas (Analyst)
Hey, good afternoon, guys.
Mark Butler (CEO)
Hey, Brad.
Bradley Thomas (Analyst)
First question, just around tariffs and, if you could give us your latest thinking on, for one, the financial impact of the 25% List Three tariffs, you know, on your current guidance, and then more broadly, how you see the tariffs changing the retail industry and how you all react to that, you know, more broadly, would be great?
Jay Stasz (CFO)
Sure, Brad, this is Jay, and I'll start with that. As far as our guidance, right, our tariffs are embedded in the margin. They're actually part of our supply chain costs, but we are sticking to the 40.1% gross margin on an annual basis. For us, what we have baked into the model is really the 10% tariffs on the third list, List Three. If that moves up from 10%-25%, what we're thinking is that we wouldn't have a major impact on margin. One, just because the level of imports we do and the imports that are actually impacted by tariffs is not very material.
And maybe more importantly is that, you know, like Mark talked about, we're a price follower, so we think that if, if the tariffs move from 10%-25%, the market will react, which will drive retail prices up, and we'll follow along with that, which will keep our margin intact.
Bradley Thomas (Analyst)
... Gotcha. And then, Jay, I think you talked about gross margin being down in Q2, you picking that up in the back half of the year. What's driving that pressure in Q2, and what's changed versus the way you had forecast the quarters originally?
John Swygert (COO)
Yeah, Brad, a good question. Nothing's really changed. It's just kind of actualizing Q1 and our model with our actual product mix and our actual costs on supply chain. It's just kind of refining that and cleaning it up, actualizing it, and just, you know, there's a little bit of shift in cadence, but no major, major call-outs to it.
Bradley Thomas (Analyst)
Gotcha. Thank you very much.
John Swygert (COO)
Thanks, Brad.
Operator (participant)
Thank you. Our next question comes from the line of Elizabeth Suzuki from Bank of America. Your question, please.
Elizabeth Suzuki (Analyst)
Great. Thanks, guys. Just sort of following up on the tariff question. Have you seen any opportunities for interesting deals in the fallout of the tariff environment for other retailers that are maybe more impacted than you are?
Mark Butler (CEO)
Yeah, that's, that's a great question. And while we are ready, willing, and able to take advantage of any disruption, we haven't seen a lot come through with that because, I believe, you know, there's a possibility that if and when the additional 15% goes through, that might become a little bit more accentuated, and there might be some more canceled orders. But at the 10%, it appears that most people have been able to mitigate or be able to navigate the waters with the 10%, but we have not seen major deal flow in, in relation and because of that, Liz.
Elizabeth Suzuki (Analyst)
Okay, great. And yeah, just in general, have any recent retail store closures been helping to drive the strong closeout environment? And any noteworthy opportunities that you would want to call out?
Mark Butler (CEO)
Not on the liquidation side, because, by and large, most of them have been smaller and apparel-based or footwear-based. You know, obviously, we've been able to benefit, most recently in this year with the opening of some of the Toys "R" Us sites that we were able to procure and buy and, or take over the leases from last year. But, not on the retail merchandise side, no.
Elizabeth Suzuki (Analyst)
Okay, great. Thank you.
Mark Butler (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line, Randy Konik from Jefferies. Your question, please.
Randal Konik (Analyst)
Hey, thanks a lot. Mark, I just wanted to ask you, if you think about, you know, the long term, and you think about, you know, the ability as you're getting bigger, you're scaling more, you're going more vendor direct. Give us some perspective of how, where you were in vendor direct in the past, where you are today, where do you think maybe things can go? Just trying to... Or, if you're looking at the chessboard, and you see the pieces unfolding over the next five years, where do you kind of think about, you know, the biggest areas of opportunity, you know, in the business potentially to occur over the long term?
Mark Butler (CEO)
Yeah, I think that, and Jay's got the exact or the approximate percentage of our direct. But, you know, when we started the march on this public company venture, we still had a great deal of our product that we were getting through closeout distributors and middlemen and brokers, and we're seeing our relationships increase with these manufacturers. I think that what I've said in the past, and even at, most recently at ICR, I think that, you know, we're certainly positioned well, and innovation breeds obsolescence. So we love it when a manufacturer comes out with a new product, because the only other thing that's gonna happen besides the new product, is they're gonna have old product, and we are able to be able to take advantage of that.
Certainly, over the last few years, in particular, Randy, we've made great strides in CPG and the consumables within our organization, and we're careful not to let that upset our cake mix, because the consumables, we certainly operate on a lower gross margin than we do on hard goods closeouts. But, you know, we don't see any slowdown. Our phone keeps ringing. The deals have been very, very plentiful. And we are, as I've said, the last call and previous, we're appropriately overbought. I love it. And, you know, we're, we're anxiously looking forward to and buying each and every day. In particular, category that I can speak of is toys.
You know, we're, we're buying to not only meet, but certainly to beat our our incredible results that we had on the toys and the toy business last year. So I think that's, we will expect that to be an area of growth this year.
Randal Konik (Analyst)
Got it. And when you think about, you know, new stores in new markets, let's say in 2018 versus years past, you're now gonna be up to almost half the states, I guess, at the end of next year or this year. You know, what's changed in terms of pace of awareness levels? It seems as if, you know, something has, you know, improved from a, you know, awareness of the brand or this of the concept has gotten quicker than, you know, in the past, in the more recent past. Just give us some perspective of what you think is different there, you know, what you think, because the new store productivity is amazing, so I'm just curious on different strategies and different uptake you're seeing with the awareness levels of the concept.
John Swygert (COO)
Yeah, Randy, this is John. With regards to the new stores, what we've seen is obviously with our scale and notoriety being public, I just think there's more awareness of the brand. We have opened up in what we believe was gonna be a hot market when we entered Florida. And that's turned out to be the truth for us, and we've seen some great results there. But we continue to open up stores in every market we've been in. The new market's just been well received, and I think what it says to us is America wants a bargain, and we continue to give them what they want.
Mark Butler (CEO)
... Yeah, I think, Randy, another thing that we see and we're excited. John just pointed out Florida. Although I don't have the intimate knowledge of Texas that I did with Florida, and that might be related only to vacation time.
Jay Stasz (CFO)
Yep.
Mark Butler (CEO)
I think Texas is gonna be, we're told it's gonna be pretty good, and we're very, very excited, and Texas is a big state! And we have four stores open there right now. We're gonna open up one or two more this year in Texas, and then in the next year, that's gonna be a major growing area for us. We're gonna open up a bunch of stores in Texas. So I think we're gonna see similar results when we really open up and start really pressing Texas. And of course, pre-Texas, we have to get the DC open, Randy. That's the main thing. That's, you know, one could say, "Why aren't you doing it now?" But we gotta get the DC so we can get our goods to the stores.
Randal Konik (Analyst)
Perfect. Thanks, guys. Very helpful.
Mark Butler (CEO)
Thanks, Randy.
Operator (participant)
Thank you. Our next question comes from the line of Scott Ciccarelli from RBC Capital. Your question, please.
Scot Ciccarelli (Analyst)
Hey, guys. Two questions. The first is: with about 60% of your store openings in Q1 coming from the former Toys "R" Us locations, is the size of those stores much different than your typical prototype? I guess I'm wondering if we're to look at your NSP, like, on a sq ft basis, for instance, you know, what would that look like relative to the way we would calculate it?
John Swygert (COO)
Scott, this is John. With regards to the TRU sites, on average, they were and are larger than our historical sites. They're probably 20% bigger in total square footage than we would normally open. In terms of sales per square foot, probably too early for us to comment on that. Let us get a little more time under our belt to see how these guys come out. They're coming out of the gates very strong, and we're very pleased with the results thus far, but we don't have enough information yet to really tell you their sales per square foot compared to our overall mature chain. But I think it should be pretty comparable, maybe a little bit lighter than what we see in the overall boxes that we have today.
Scot Ciccarelli (Analyst)
Got it. I guess I'm just trying to figure out, you know, Jay's comment that, you know, you are planning for NSP to be north of 100. Is that a function of the Toys "R" Us because the stores are bigger, or is it more because of the front-end loading? Just trying to, you know, size those deltas.
Jay Stasz (CFO)
Scott, yeah, it's really driven by the front-end loading and the cadence more than anything.
Scot Ciccarelli (Analyst)
Got it. Okay. And then secondly, can you help quantify the impact of the reverse waterfall and higher level of cannibalization that you cited before? I know you guys have talked about that reverse waterfall impact. Don't think I've heard a whole lot about cannibalization in a while, so just wondering if you could kind of help us, you know, provide a little color on that. Thanks.
Jay Stasz (CFO)
Yeah, Scott, you know, that's one of those things we're opening these stores very strongly, which is great, but we are seeing those headwinds. But at this point, we're not ready to give specific quantification of that. We're kind of still peeling the onion on it. You know, in general, it's something that we can see out there, we can see the impact, but it's... Generally, it's just hard to calculate and isolate that impact specifically, so we're not ready to quantify it.
Scot Ciccarelli (Analyst)
So is the idea of citing it as, you know, kind of like a bigger call-out just because of the faster number of stores then, Jay? Store openings?
Jay Stasz (CFO)
Just, yeah, it's as it compounds with the strong comps in 2017 and 2016 and 2018, it's just something that we've discussed before, generally, and we talk about it internally, but you know, it's part of the mix.
John Swygert (COO)
And Scott, we just, we wanted to bring it up because we're seeing it, and we thought it was prudent for us to tell you guys about it.
Scot Ciccarelli (Analyst)
Got it. Okay. Thanks a lot, guys.
Mark Butler (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Judah Frommer from Credit Suisse. Your question, please.
Judah Frommer (Analyst)
Hi, thanks for taking the questions. Maybe first, just getting back to tariffs for a second. You know, some of the questions we get are tariffs kind of the impact limited to private label within your business? Do you see impact in the 70-ish% of product that is sourced on closeout? Can you help us just kind of with the different drivers in different areas of the business?
Jay Stasz (CFO)
Yeah, no, the bulk of that closeout product is all sourced domestically, so there's no impact from that. Really, right on the private label you said, and we do have some direct factory deals that are impacted, that might be about 20% of our purchases come from overseas. But then of that, there's only a portion that are impacted by tariffs, call it 15%-20%, is what we've seen historically. So at the end of the day, the amount of purchases impacted by tariffs is about, you know, 3%-5%. And again, if the retail market moves, we're price followers, not price setters. So we would look... One, we would look to change retails if the big box stores change their retails, then we're always on the lookout.
Mark is always pushing his buyers, if there is a tariff impact, to try to get a better buy with our suppliers.
Judah Frommer (Analyst)
Okay, perfect. And then maybe, Mark, can you help us historically, when you have kind of some late spring rainy weather, you know, what have you seen in terms of kind of that pop that you're talking about in Q2 for seasonal merchandise, maybe specifically lawn and garden and hot weather?
Mark Butler (CEO)
Yeah, I think, we look at it a couple of things. You know, for us, it is more lawn and garden, patio furniture, and air conditioners and pool chemicals. So when you have a less than favorable weather pattern, there's not too many people that were opening up their pools. We fully expect them to open their pools. We fully expect to be able to sell shock and chlorine. You know, the lawn furniture, it just hasn't been nice. We have plenty of lawn furniture. We're ready, we're locked, we're loaded, and we just need a little bit of good weather.
And then if we have a couple of nights that it's really, really tough to sleep, that's when the air conditioners really take off, and we're fully expecting that the heat is gonna come. You know, they've been performing just fine down south, but air conditioners sell better up north because of central air systems. But, you know, we think—and we really do look, and, you know, we've been on, I don't know, 4 or 5 calls like this before, where we look at Q1 and Q2 as merchants together as the selling season. We take it right through July and August.
Judah Frommer (Analyst)
Great. Thanks a lot.
Mark Butler (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Rick Nelson from Stephens. Your question, please.
Rick Nelson (Analyst)
Thank you. Can you provide an update on some of the newer categories like apparel and pets, and are you adding any new buyers to the company to pursue other merchandise categories?
Mark Butler (CEO)
Yeah, there's no other categories that we're going after, and apparel was one of the positive comping departments in Q1, and we see a nice trend in Q2. You know, we don't have any other or any new buyers coming on board that that we would announce. As far as additional categories, other than the 21 that we have, we don't see any other additions, Rick.
Rick Nelson (Analyst)
Gotcha. And,-
Mark Butler (CEO)
By the way, pets we've been doing, you know, and focusing on, it's just been performing very, very well and continues to do well.
Rick Nelson (Analyst)
Great to hear. You're sitting on a big, you know, pile of cash, $58 million. You've got another $42 million that came from the sale-leaseback. If you could speak to, you know, that should continue to grow, I take it. Where, where do you see the cash position absent buybacks? And, you know, what sort of level of cash do you think you need to run the business?
Jay Stasz (CFO)
Sure. Rick, this is Jay, and I mean, generally speaking, right, we, you know, we think having $100-$150 million of cash on our balance sheet is fine, and there's a lot of companies that have even more than that. To your point, right, we're gonna have incremental $42 million coming into the coffers from the sale-leaseback, but we're also, this year, spending, you know, $75-$80 million of capital related overall, and we're going to pay for the building out of our third DC in Texas. So that's gonna take a chunk of capital and a chunk of cash off our books. So we're comfortable, again, right, where we're at. We announced the stock buyback last quarter.
You know, but again, we'll have maybe $100-$150 million of cash on our books, so we're not. We think that's the right level to have from an operating standpoint. We're not rushing just to get that cash off our balance sheet.
Rick Nelson (Analyst)
Okay. Great. Great. Thanks, and good luck.
Jay Stasz (CFO)
Thank you, Rick.
Operator (participant)
Thank you. Our next question comes from the line of Edward Kelly from Wells Fargo. Your question, please.
Edward Kelly (Analyst)
Hi, guys. Good afternoon. Mark, I just wanted to, I wanted to ask a follow-up on, on toys. You know, you mentioned on toys that you were, buying to beat. Can you just provide a bit more color on, what the market looks like, particularly as the industry cycles out of the disruption we saw last year? And then I guess, as part of this, how much toy inventory are you sort of packing away? And is this, part of what, you know, where your conf-- what, I guess, your confident tone sounds, around toys this year?
Mark Butler (CEO)
Yeah, we've been after the toys. We went hard, obviously, even before Christmas of last year in anticipation of this year, and I feel good about our purchase. Obviously, we won't give you the number, but I feel good about where we're at. I will tell you that our philosophy is to try to widen our breadth, widen our assortment of closeouts, and perhaps maybe don't be quite as deep. Our philosophy is to focus a little bit more on preschool toys, and I think you're gonna see a lot of preschool toys in our stores this year. I think our merchant, Scott, has done a phenomenal job, and there's plenty of toys that have arrived and will continue to arrive.
But once again, the confidence is that not only are we going to meet the sensational results we had last year, we have every intention of beating that, Ed.
Edward Kelly (Analyst)
Okay. And then I wanted to ask you about SG&A. And I was hoping that you could talk about costs and, you know, what is a continuation of just robust expense leverage. I mean, you leveraged SG&A on, you know, on a less than 1% comp, and you leveraged by 40 basis points. It's better than sort of how you were thinking about full year guidance. I was hoping just to start, maybe you could talk about, you know, how things played out relative to expectation. And then beyond that, just bigger picture, you know, what is it about the model that's allowing you to drive such, you know, unique leverage despite the strong store growth?
Jay Stasz (CFO)
Sure. Ed, this is Jay, and I'll start, and you have a lot of questions packed in there, but I'll address what I can, and we'll go from there. But yeah, the SG&A leverage, it was good in the quarter. It was 40 basis points. And like you said, we didn't really have it on the comp side, but the new stores performed, so the total sales beat our expectations. So we saw a lot of leverage on the G&A side versus maybe the selling side. We leveraged our G&A labor. We had some insurance costs, which we were able to lever in the quarter, as well as we did get some benefit just overall on utilities, driven by rate in the quarter. So that's where we got the SG&A leverage in the quarter, which is great news.
and also, just from a culture standpoint, we constantly focus on our expenses, and if we don't have to spend the money, we don't spend it. And that, that, that doesn't change. That comes from the top, with Mark and John, and so that will never change. On an annual basis, we had probably planned, about 10 basis points of leverage on the last call, and now with the goodness in Q1, you know, maybe we're closer to, 15 or 20 basis points of leverage on SG&A. And then, you know, that's just, I think, as far as our ability to, grow stores and continue to lever, again, it just gets back, that's our culture. That's the way we go to market. We don't have a high touch environment, and if we don't have to spend the expense, we don't do it.
John Swygert (COO)
Just the way to think about, the leverage point on comp, over a multi-year basis?
Jay Stasz (CFO)
Yeah, I think it stays at that, you know, 1-1.5. And again, I think, you know, people wanna try to take it up as we grow, which I understand that, but, you know, we run lean, and when we run tight. So there are gonna be times when we're gonna invest in management or other things as we look out over, you know, 2, 3, 4 years. So I wouldn't model anything more than, you know, 10, 15, 20 basis points of leverage each year.
Edward Kelly (Analyst)
Okay, thank you.
Jay Stasz (CFO)
Sure. Thank you.
Mark Butler (CEO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Paul Lejuez from Citigroup. Your question, please.
Paul Lejuez (Analyst)
Hey, thanks, guys. Mark, for the second quarter now, you've used the term appropriately overbought, and I'm just curious if you feel that there are any categories that you're a little bit heavier than you'd like to be coming out of Q1? I'm also curious if there are any that you felt light in during the first quarter, where maybe you missed some sales opportunity, and if so, what was the cause of that? And I'll ask follow-up. Thanks.
Mark Butler (CEO)
Yeah, I don't think that I worry at all about any of the inventory levels. I think that I get excited about the inventory levels. I think that I'm excited about where we are in the toys vis-à-vis where we were last year at this time, because we have a lot more knowledge. We also have a lot more customers that came to know us for toys. So, I'm excited about that. You know, with it being a deal-related or driven business, there's the ebb and the flow of a deal that, you know, we had a big coffee deal last year that we didn't have this year. I'm not talking about the major coffee. I'm talking about a specific coffee deal. We didn't have it this year.
So the ebbs and the flows of the closeout business, they happen each and every day. I think that the seasonal business performed just fine in Q1. We would've expected it to be better if we would've had better weather. There was a lot of noise in Q1 that we weren't involved in. That was the weather. It was a late Easter. You know, there's all the noise about the tax refunds and everything. So, you know, I was just thrilled with our performance and, you know, we're locked and loaded and just need some, need some sunshine, some hot weather, and I feel good about where we're at.
Paul Lejuez (Analyst)
Gotcha. And then, on the new stores, can you distinguish between the performance of the Toys "R" Us locations versus the non-toys locations? I'm curious if you're seeing equally strong performance at both, or if it's the toys boxes that's really the driver of the better than expected results?
Jay Stasz (CFO)
Yeah, this is Jay, and we're seeing good performance across both. We're not gonna get into splitting those out, but both are performing very well.
Paul Lejuez (Analyst)
You, you did mention cannibalization, you know, first time that we can remember. Was that more related to the toys locations or just something you're seeing across the board?
John Swygert (COO)
Paul, this is John. This is really related to across the entire board. We, we've talked about it previously. We have not talked about it a ton because we don't necessarily think it's proper to quantify it, but it's something that's out there. And as we continue to grow the chain and continue to have what we call backfilling in existing markets and strong grand openings and Reverse Waterfall impacts, there's definitely a drag on the comps. We've had it forever. We continue to feel it, but we just felt it was appropriate to call it out, to remind everyone, because we don't talk about it a ton.
Paul Lejuez (Analyst)
Gotcha. Thank you. Good luck.
Mark Butler (CEO)
Thank you.
Jay Stasz (CFO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Jeremy Hamblin from Dougherty & Company. Your question, please.
Jeremy Hamblin (Analyst)
Congrats on the strong results. Thanks for taking the questions. I wanted to come back to the new unit productivity. In thinking about future locations, given the strong performance of the TRU locations, do you think about potentially going a little bit larger in terms of, you know, your target model going forward, maybe to that 35,000-40,000 sq ft kind of as your new type of site location?
Mark Butler (CEO)
Well, I think that, you know, the Toys "R" Us sites, in particular, provided a very, very unique opportunity for us, where we could go to bankruptcy court and raise our hand to whether or not we wanted to participate to buy the, the property and/or buy the lease. You know, some of those stores, most of those stores were larger than the average that what, what we have been opening up over the last, several to many years. That being said, the non-Toys "R" Us sites are doing phenomenal. They're, we're crushing it in all of the stores. So, it's not totally related to just TRU sites.
The TRU sites, as a whole, were probably more opportunistic for us to get more Main and Main opportunities at a value price on the rental and/or on the ownership, which we subsequently have the sale-leaseback. And, you know, that could be, that could be—it's way too early for us to know, but we're certainly hoping that those average unit volume per unit are gonna do more in a 42,000 sq ft store than what we would in a 33,000 sq ft store. We're excited. We're excited about the non-TRUs, and we're excited about the TRUs. It's just way, way too early to really quantify the TRU site productivity, and keeping in mind that it's 12 of the 42 that we're opening this year, and I think we're gonna open up a couple of more TRUs this year.
Jay Stasz (CFO)
Yeah. Yeah, we do.
John Swygert (COO)
... Yeah, and Jeremy, I think we definitely, we've definitely not been seeing anything that makes us feel we need to change our overall new store model. The thirty to thirty-three thousand square foot store is what we believe is our sweet spot, and we obviously move off of that number depending on the opportunistic opportunities we have in the marketplace. So that's just how we work it, and we try to average into the thirty-two thousand square foot store.
Jeremy Hamblin (Analyst)
Okay, great. And then a follow-up question on the toy category performance. And as you look back in history where we've had, you know, really strong, let's say, licensing movies, and we've got a slate of them, you know, this year, that clearly probably presents opportunities for you, how has that, you know, excluding kind of the vacuum left by the TRU opportunity, has the category performed in years in which there's these really big licensing deals that are out there, whether it's, you know, kind of a Star Wars year or, you know, Frozen, and this year we've got a whole slate of them?
Mark Butler (CEO)
Yeah. And, look, we're able to benefit from it, Jeremy, but I gotta tell you, I'm not gonna have Toy Story 4. I'm gonna have 2--Toy Story, probably 2 and 3 product.
Jeremy Hamblin (Analyst)
Right.
Mark Butler (CEO)
And that's just the nature of the closeout industry. So next year, in all likelihood, I'm gonna have Toy Story 4 product. You know, we certainly, you know, the Olaf doll is gonna sell again once Frozen comes out in the fall. You know, all of the Toy Story stuff that we have and have bought this year, you know, I think it's gonna be released tomorrow. You know, we're gonna be bringing Toy Story product into the store in the next week or two. So it's not anything that we would deem to be a driver specifically. However, we do pay attention to it. We wish we could get the current, the hottest, the latest, the greatest at closeout prices, but we usually have to wait a year.
Jeremy Hamblin (Analyst)
Right. No, understood. Okay. Thanks for taking the questions, guys. Good luck.
Mark Butler (CEO)
Great. Thank you.
John Swygert (COO)
Thank you.
Operator (participant)
Thank you. Our next question comes from the line of Anthony Chukumba from Loop Capital Markets. Your question please.
Anthony Chukumba (Analyst)
Thank you for taking my question. Just wanted to focus very quickly on Ollie's Army. You mentioned that you have over 9.4 million active members, and that was up 11% year-over-year. Can you provide any color just in terms of what percentage of their sales, what percentage of your sales Ollie's Army members account for? And then the only other question I had was, just wanna see if you would provide any commentary just in terms of the member ranks. And I mean, if you're not gonna give us numbers, I'd certainly appreciate that, but just any color just in terms of how the member ranks are sort of building out relative to your expectations. Thanks.
John Swygert (COO)
Sure, Anthony, this is John. With regards to the overall Army, it makes up just north of 70% of our total sales now, which we're very, very pleased with it. They are the most responsive members we have. They spend about 40% more than non-Ollie's Army members, and they obviously frequently visit our store more than our non-members as well. So the Army is as strong as it's ever been and keeps getting stronger. We've been making enhancements into the programs that we have to try to make it easier for folks to onboard and give us better opportunity to track them and speak to them. And I think we're on the right path of doing that. The growth is stronger than we'd expected in the quarter, so we're very pleased with that as well.
With regards to the ranks, the ranks are very early. Obviously, we reset our rank balances at the beginning of the year, and we are. The two and three stars, we don't wanna talk about them. I would tell you we're very happy with the performance that we've seen thus far within our overall changes in the program. And we'll report more as we go, even though I won't necessarily call out the percentage of the ranks, but we are pleased with what we're seeing so far.
Anthony Chukumba (Analyst)
Got it. That's very helpful. Thank you.
John Swygert (COO)
Thank you.
Mark Butler (CEO)
Thank you, Anthony.
Operator (participant)
Thank you. Our next question comes from the line of Chris Prykull from Goldman Sachs. Your question please.
Chris Prykull (Analyst)
Good evening, guys. Thanks for taking the questions. I just had a quick follow-up on gross margin. I think you guided 2Q down about 20-30 basis points, if I heard you correctly. I guess, what was that related to? And then was there any markdown risk, that you see in 2Q from excess seasonal product?
Jay Stasz (CFO)
Yeah, Chris, this is Jay, and we did. We just, we just wanted to clarify the cadence we saw in the models that there were some disconnects. So right, we just wanted to clarify that and say 20-30 basis point decrease year-over-year in Q2, and then we get that back in the back half of the year. So on a full year basis, we're right at the 40.1. So there's really, you know, no fundamental changes in the business or the model, just kind of clarifying and doing some housekeeping there.
Chris Prykull (Analyst)
Got it. And then expectations for freight and distribution costs throughout the rest of the year?
Jay Stasz (CFO)
Yeah, well, we're on an annual basis, we had planned the 40.1, which was kind of comprised of an increase in merchandise margin of about 20-30 basis points, and that would be offset by increased costs on supply chain of about 20-30 basis points. We are seeing increased costs on our supply chain, primarily related to investments in wages and labor at the DCs, as well as on the trucking front, we are seeing increased costs both on inbound and outbound, primarily just due to longer hauls, not so much because of the spot rates or the cost of diesel fuel. But, but we are seeing increased costs. Those costs follow inventory, so they come out when the inventory turns more or less.
But it's embedded in our full year guidance of margin of 40.1%.
Chris Prykull (Analyst)
Great. Then if I could just squeeze one last one in. Just on your real estate strategy, longer term, you know, I guess, you know, with the Toys "R" Us sites, you mentioned those are sort of more Fifth and Main locations. Are you looking to maybe upgrade existing locations to better sites if you get the chance?
John Swygert (COO)
Chris, this is John. With regards to our stores and our overall performance of our stores, I would tell you, it's really hard to upgrade a store or change a store when you have very, very profitable stores. We find ourselves in that luxury, if you wanna say that. So we always are looking in the right—if the right space were to come available, we would consider it, but we are not actively, as you can tell and look at our history, we're not big on relocations. Our stores are very profitable, so moving stores, it's hard to get a payback on it. But we're continuing to look at existing TRU sites that are available out in the marketplace today, and there are still quite a bit of them out there to look at.
And there's other retailers that have had some issues in the most recent couple of years that have plenty of availability out there as well. So we're continuing to take a look at the opportunities to continue to get good real estate.
Chris Prykull (Analyst)
Great. Thanks so much, and good luck the rest of the year.
John Swygert (COO)
Thanks, Chris.
Mark Butler (CEO)
Thank you.
Operator (participant)
Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Mark Butler for any further remarks.
Mark Butler (CEO)
Great. Thanks, everyone, for participating in our call and for your support of Ollie's. As you just heard, we had a great start to the year, and we're excited for the continued growth in 2019. We look forward to sharing our results with you on our second quarter call in early September. Thank you very much, and have a great day.
Operator (participant)
Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.